Issue Chair: James English
Issue Vice-Chair: Josh Cohen
Drafting Team: Christina Cutlip, Ron Gephardtsbauer, Kevin Hanney

There has been a recent movement of participant assets out of Defined Contribution (DC) and Defined Benefit (DB) Plans, and into retirement accounts not covered by ERISA, such as IRAs or other savings accounts, or as plan distributions. This occurs in the DC Plan context when the participant leaves an employment relationship and elects to take DC plan assets out of the plan, but not transfer them to the DC Plan of another employer. It can also occur when a participant requests a withdrawal or loan because of hardship or other significant life event reasons. In the DB Plan context, it occurs when the participant elects to take a lump-sum distribution of his or her pension benefit. In some cases this occurs when the DB plan is terminated forcing the participant to make a decision to either cash out, transfer to another DC plan, or to other retirement savings vehicles.

We shall examine some of the factors leading participants to leave their assets in or move them out of the Plan. Factors for DC plans may include fees, the number and quality of investment options, considerations of personal control versus third party expertise, legal considerations such as fiduciary duty, ERISA creditor protections and spousal protections, inertia in the face of default provisions, the difficulty of rolling the DC Plan assets into the DC Plan of a new employer and other factors that may depend on specific personal circumstances. For DB plans, these factors may include interest rates for determining lump sums and also other benefits, rights, and features in the plan. The benefits of transferring to an available DC Plan will be considered.

The Council will focus on evaluating differences between the employer and non-employer based system, understanding plan sponsor attitudes around keeping participants within their plan or the employer based system overall, and discussing whether there are positive steps that can be taken to further encourage individuals to stay in the system if it makes sense for them to do so.

We will examine the types of communications participants are receiving from their employer when they leave employment and whether the quality of the participant's decision-making can and should be enhanced by communication or other plan design features from the plan sponsor.

While the plan sponsors may (or may not) have an interest in keeping participants' assets in the Plan because, for example, it affects the level of investment or administrative fees allocated to the individual participants, they may be reluctant to provide meaningful communication to the departing participant out of concern for potential fiduciary liability.

The Council will focus on the following areas:

  1. Compare and contrast considerations for participants in deciding whether or not to leave money within the employer based system.
  2. Gain a better understanding of asset movements out of the employer based system. The aim is to answer questions such as:
    1. The frequency of withdrawals
    2. The volume of assets leaving the system
    3. Where the money is going
    4. Why participants are making decisions to move money
    5. The challenges participants face in making decisions, including the challenges to consolidate assets into a new employer's plan
  3. Understand the plan sponsor's perspectives and attitudes towards retaining assets within their plan including:
    1. What are the pros and cons?
    2. Are there useful and informative communications the plan sponsor can engage in that do not implicate fiduciary liability?
    3. Is there guidance that the DOL can offer that would address such concerns?
    4. Are there plan features, investment options and other aspects of plan design that the plan sponsor may consider which can facilitate long-term plan participation?
    5. How do certain plan design features impact participants' decisions around what to do with their assets at the time employment ends?
  4. Examine what information is currently available to participants from DOL and other government sources concerning the pros and cons of rollovers to IRAs, whether the DOL's providing such information on its website would make sense and whether suggesting to DC Plans that they might wish to provide link(s) to such information would be helpful.
  5. With respect to hardship and other withdrawals and loans from the DC Plan, examine whether there are educational programs or reasonable plan mechanisms which can serve a positive role in discouraging pre-retirement withdrawals and facilitating return of assets to the fund.

Last year's Council considered significant aspects of DB Plan lump-sum distributions in its study of "Private Sector Pension De-risking and Participant Protections." The 2012 Council considered aspects of DC Plan hardship withdrawals in its study of "Managing Disability Risks in an Environment of Individual Responsibility." This Council does not intend to revisit those areas in this study.

Participants who are leaving employment may receive outside communications raising the possibility of their rolling their assets over into IRAs. It is not our intent to examine these communications as this is an area the Department is already actively focused on through its proposed conflict of interest regulations.