Statement of the Investment Company Institute

On Orphan Defined Contribution Plans
Before the ERISA Advisory Council
Working Group on Orphan Plans

July 18, 2002

Good afternoon. My name is Thomas Kim, Associate Counsel at the Investment Company Institute,¹ the national association of the mutual fund industry. The Institute appreciates the opportunity to testify at this meeting of the ERISA Advisory Council's Working Group on Orphan Plans and commends the Council and the Department of Labor for your attention to this important matter. For several years, the Institute has been seeking a solution to enable orphan plan participants to receive their benefits. Accordingly, we strongly support the Council's work in this area.

I. Role of the Mutual Fund Industry in Retirement Savings
To provide some context for my remarks, I'll initially provide a brief overview of the mutual fund industry's role in retirement savings. The U.S. mutual fund industry serves the retirement savings and other long-term financial needs of over 88 million Americans. By permitting individuals to pool their assets in a diversified fund that is professionally managed, mutual funds play an important financial management role for American households. In the retirement savings market, mutual funds function as an important investment medium for employer-sponsored retirement plans, including 401(k) plans, 403(b) arrangements and SIMPLE plans used by small employers, as well as for individual savings vehicles such as the traditional and Roth IRAs. As year-end 2001, about $2.3 trillion in retirement assets, including $1.1 trillion in employer-sponsored defined contribution plans and $1.2 trillion in IRAs, were invested in mutual funds. The $765 billion of 401(k) plan assets held in mutual funds represented about 44 percent of all 401(k) plan assets.²

In addition, many mutual fund companies provide nondiscretionary administrative services to employer-sponsored plans, including trust, recordkeeping, tax compliance, prototype plan, and participant education services. The role that a mutual fund company plays with respect to a retirement plan varies from firm to firm. Some mutual fund companies provide a broad range of plan services, often as part of "bundled-services" products that provide a package of administrative, custodial and investment services. Other fund companies may provide investment services only-that is, they simply offer investment options under a defined contribution plan menu. Still others offer a combination of these services that may also vary among the different plans they service.

II. Orphan Plans and Mutual Fund Companies
"Orphan" or "abandoned" defined contribution plans, as you are aware, are plans for which there is no longer an employer or other plan fiduciary. No party, therefore, is available to administer the plan or authorize distributions to participants or beneficiaries. A plan may become orphaned because the person who served as the sole plan fiduciary may have died, or because the corporate plan sponsor may have been dissolved as a business entity, whether in or outside of bankruptcy proceedings. In other situations, the owner may have simply abandoned the business entity and its retirement plan.

Fund companies may discover that a plan has been orphaned under a variety of circumstances. One common fact pattern is that a plan participant or beneficiary contacts the plan service provider, seeking a distribution from the plan and representing that the plan fiduciary has died or is otherwise unavailable. Other ways that a mutual fund company may learn that a plan has been abandoned are: (1) the fund company receives a bankruptcy filing notice, indicating that a plan sponsor is liquidating in federal bankruptcy proceedings; (2) a financial advisor or broker serving as an intermediary between the plan and the service provider informs the fund company that the plan sponsor is no longer operating; and (3) statements or other plan-related mailings that are sent to plan fiduciaries are returned as "undeliverable."

Although the Institute does not have comprehensive data on the number of orphan plans, anecdotal information from member companies has provided us with a general understanding of the scope of the orphan plan problem. Overall, while Institute members observe that there do not appear to be a large number of orphan plans at their respective firms, a large segment of Institute members report that they are dealing with orphan plans, and that the issues raised by them cause significant legal and practical difficulties. The number of such plans varies greatly among different firms-ranging from half-a-dozen plans at some firms to several dozen or more at others. Moreover, as prototype plans are being amended for "GUST"-a process which requires plan sponsors to adopt amended plan documents-it is very likely that additional orphan plans will be discovered.

The size of orphan plans-both in terms of number of participants and the assets held-also varies widely. Generally, however, most of the plans known to be orphans are relatively small, having less than 25 participants. Often, they are plans maintained by sole proprietorships with just several participants, generally holding less than $500,000 in total assets. This is not to say that all orphan plans are small; Institute members do occasionally learn that a large client-plan with hundreds of participants and millions of dollars in assets has become an orphan.

III. Issues Raised by Orphan Plans
Orphan plans raise a host of significant issues. I'll discuss several here from the perspective of the fund industry. Previously, I mentioned that mutual fund companies often discover that a plan is orphaned when a participant contacts a fund company, seeking a plan distribution and claiming that the plan sponsor is no longer in existence. This situation illustrates the difficult position that fund companies are put in with regard to orphan plans. Institute members generally do not act in a fiduciary capacity with respect to retirement plans; rather, they provide nondiscretionary recordkeeping, trust and administrative services to retirement plans, in addition to providing the mutual fund products in which plans invest. To the extent that they serve as trustees, they function as "directed trustees": in the absence of affirmative direction from a plan fiduciary, they are not authorized to make plan distributions or other discretionary decisions. Thus, fund companies generally are unable make distributions to orphan plan participants.

Second, a mutual fund company may often lack the necessary plan and participant information to even ascertain whether a participant is eligible for a distribution. In many cases, the plan sponsor may have been the only party with certain plan-related papers, including the plan document. Furthermore, the types of services that mutual fund companies and other service providers may offer to retirement plans vary greatly. A mutual fund company that, for instance, provides only investment products for a 401(k) plan may not have any participant-specific information, and the plan assets invested in its mutual funds likely would be held under the name of the plan or plan trustee. Hence, even if mutual fund companies were authorized to do so, they would be unable to ascertain whether an appropriate distribution is being made to the right individual and for the correct amount.

Third, many orphan plans have plan qualification defects because no plan sponsor has been available to maintain the plan. Plans, for instance, may not have been updated for new tax law changes. Indeed, it is unlikely that a plan that has been orphaned for an extended period would satisfy the numerous requirements of Code section 401(a). Similarly, the plan may be delinquent in submitting required regulatory filings, such as the Form 5500 annual report.

IV. Recommendations
Notwithstanding the myriad of legal and practical concerns that arise with orphan plans, we believe that a program could be developed to facilitate the delivery of benefits to participants and beneficiaries. Toward this end, we suggest that the Department of Labor and the IRS jointly develop a program in accordance with the following broad guidelines.

Under the program, plan service providers could follow one of two approaches at their option. First, service providers could voluntarily make distributions to orphan plan participants to the extent that they have sufficient information concerning the plan, participants, accrued benefits, and other relevant information. By following the program's specified guidelines, the service provider's actions would be viewed as nondiscretionary in nature, and therefore, would not give rise to fiduciary status under Title I of ERISA. The program would also clarify when a plan is considered "orphaned," since, notwithstanding strong indicia that a plan has been abandoned, a service provider may not have direct, actual knowledge in many cases.

Alternatively, the plan service provider could submit the available information relating to an orphan plan to a government-established clearinghouse. The government entity could then "bundle" such plans and seek appointment of an independent fiduciary to authorize distributions. The bundling of these often small plans would provide greater efficiencies and economies of scale. We understand that the Department of Labor is already utilizing a similar type of approach through its regional offices. To the extent that the program builds upon the Department's current efforts, we would recommend that the Department develop uniform, publicly available guidelines that will (1) facilitate the referral of orphan plans by service providers to the Department without imposing burdensome requirements on the providers, and (2) expedite the delivery of distributions to participants.

Additionally, the program would address the plan's potential qualification deficiencies under the Internal Revenue Code. From a public policy standpoint, because participants under such plans are not responsible for the dissolution or absence of the employer, distributions should be made as if the plan were qualified-notwithstanding the existence of qualification defects. This should include allowing distributees to preserve the assets for retirement by rolling over the assets to another retirement savings vehicle, subject to otherwise applicable rules.

In our view, this approach would provide a prudent and flexible framework under which participants could receive their distributions. We would be interested, of course, in exploring other approaches as well. We note, however, that any effort to develop the details of such a program should be based on a number of policy objectives. First, the program should emphasize the efficient delivery of distributions to orphan plan participants, given that many participants of orphan plans may not have alternative sources of retirement income. Second, to extent that service providers are permitted to deliver distributions under the program, program rules should reduce potential liability for such activities, refrain from imposing requirements that fall outside the scope of their duties as service providers, and account for the diverse factual situations encountered by service providers, including the varying degrees to which plan and participant information is available to them. Third, the program should minimize the administrative costs of the program, particularly because participant accounts may be the only available source of funds.

Finally, we offer one other recommendation that would likely require a legislative solution. As previously alluded to, a plan may become orphaned due to the plan sponsor's liquidation in bankruptcy proceedings. While in bankruptcy, the party in the best position to authorize distributions from a defined contribution plan is the bankruptcy trustee. The Bankruptcy Code, however, does not clearly assign this responsibility to the trustee. And although the duties of a bankruptcy trustee-as the representative of the bankruptcy estate-should include the resolution of pension issues, many bankruptcy trustees are reluctant to assume such duties.

A legislative clarification of a bankruptcy trustee's responsibilities with regard to pension plans would be helpful. The legislative proposal, for instance, should clarify that a bankruptcy trustee steps into the shoes of the plan sponsor in bankruptcy to authorize distributions to participants and otherwise wind down the plan.

V. Conclusion
Again, we thank the Working Group on Orphan Plans, the ERISA Advisory Council, and the Department of Labor for focusing on this issue. We would be pleased to assist this group in the development of an effective approach to addressing orphan plans and the needs of their participants.

¹ The Investment Company Institute is the national association of the American investment company industry.  Its membership includes 8,928 open-end investment companies ("mutual funds"), 499 closed-end investment companies and six sponsors of unit investment trusts.  Its mutual fund members have assets of about $6.898 trillion, accounting for approximately 95 percent of total industry assets, and over 88.6 million individual shareholders.

² Mutual Funds and the Retirement Market in 2001, Fundamentals, Vol. 11, No. 2, Investment Company Institute (June 2002).