Westlaw Journal Formerly Andrews Litigation Reporter
Litigation News and Analysis • Legislation • Regulation • Expert Commentary VOLUME 7, ISSUE 2 / MAY 28, 2010
(ASBESTOS) Automatic rollovers make retirement plan
7 Judge OKs Congoleum’s
pre-bankruptcy payments to
administration easier when companies file
asbestos plaintiffs’ lawyers
In re Congoleum Corp. (D.N.J.)
DISCHARGES Terry Dunne of Millennium Trust Co. discusses how employment retirement plan
8 5th Circuit OKs drawdown administrators of bankrupt companies can use the automatic-rollover process,
to satisfy electricity retailer’s especially when employees are “missing” or nonresponsive.
debt SEE PAGE 3
In re Texas Commercial Energy
9 Labor Department seeks
to block Tribune plan Defunct banking firm’s ex-execs can tap
In re Tribune Co. (Bankr. D.
Del.) D&O policy for defense costs
10 Debtors can’t escape balance
owed on surrendered car,
2nd Circuit says
AmeriCredit Fin. Servs. v.
Tompkins (2d Cir.)
11 D&O insurer off the hook for
defense of Delta Financial
Delta Fin. Corp. v. Westchester
Surplus Ins. Co. (3d Cir.)
12 Federal judge tosses Calif.
claims against WaMu direc-
In re Wash. Mut. Sec. Litig.
13 Mayer Brown not liable in
Refco securities fraud case REUTERS/Fred Prouser
Pac. Inv. Mgmt. Co. v. Mayer
Brown (2d Cir.) Downey Financial Corp.’s former officers can access the defunct bank holding
company’s D&O insurance to pay for their defense against charges that they hid
NEWS IN BRIEF
from investors the extent of Downey’s exposure to risky subprime loans, a
Delaware bankruptcy judge ruled May 7.
CONTINUED ON PAGE 6
Automatic rollovers make retirement plan administration easier
when companies file bankruptcy
By Terry Dunne
Whenever a company files for bankruptcy into their own individual retirement accounts, of these participants, especially lower-paid
protection, it is almost certain to set off a and many will elect a cash distribution, employees with smaller retirement plan
chain of short- or long-term problems for which will create tax consequences. A large balances, remain in the plan after leaving the
both retirement plan administrators and number will do nothing. company.
participants. The ultimate severity of these
To put this into perspective, a Charles Schwab A recent survey by Vanguard Group Inc.
problems may be dictated by how quickly
survey conducted in spring 2009 noted that showed that automatic enrollment increased
and in what manner they are addressed.
for plan participants who were terminated plan participation significantly for key groups
Concerns and issues will develop for from their jobs one year earlier, 43 percent of employees. Participation increased from
retirement plans the moment a company of the 401(k) assets were still sitting in their 44 percent to 80 percent for employees
announces it is planning to reorganize under former employers’ plans. earning less than $30,000 and rose from
Chapter 11. These announcements are often 56 percent to 86 percent for those between
If all participants diligently informed the
accompanied by the news that significant 25 and 34 years of age. Such workers often
company of their whereabouts and confirmed
layoffs, perhaps numbering in the thousands, make up the majority of those laid off during
what they want the plan administrator to do
are forthcoming as a cost-saving measure. a bankruptcy.
In addition to the layoffs or resignations
related to the bankruptcy filing, many
Filing bankruptcy does not reduce the company’s companies have probably been managing
responsibility to provide the dollars and manpower the retirement plans for participants who
necessary to administer all its retirement departed throughout the previous decades.
plan accounts. This can be a costly situation for companies
that are in bankruptcy and trying to conserve
cash, and even more costly if they decide
to ignore the problem. It is estimated that
Even before these terminations take place, with their retirement funds, it would be an
companies are absorbing the time and
many employees participating in the plan immense help. But, this is seldom the case,
expense to manage plans for about 150,000
will decide to leave of their own volition to and a lack of instruction is only the tip of the
newly “missing” ex-employees each year,
seek other employment. These voluntary iceberg.
with a collective retirement plan balance of
resignations will continue even as the
Some of them actually may disappear as they about $375 million.
promised layoffs are implemented.
move or travel to other parts of the country
The U.S. Department of Labor recently
Filing bankruptcy does not reduce the and leave without a forwarding address. The
reported that employee retirement and
company’s responsibility to provide the company has no way to contact them for plan
savings plans are now costing employers
dollars and manpower necessary to communications, but is obligated to continue
an average of $1.29 for every hour worked
administer all its retirement plan accounts, to try to do so. Others will not disappear at
by every employee. Managing ex-employee
including those owned by hundreds or all. They will receive company information
balances contributes a good portion to this
thousands of ex-employees. To add salt to about their retirement accounts but, for
the wounds, some of the human resources whatever reason, fail to respond.
staff most familiar with the company’s plan Improper compliance with plan fiduciary
may be among those laid off or leaving. This THE MISSING AND NONRESPONSIVE responsibilities, even for ex-employees’ plan
can complicate matters even more. EX-EMPLOYEE PROBLEM accounts, carries legal and financial risk.
What happens to all the ex-employee Companies filing bankruptcy now and in the Cases like LaRue v. DeWolff, Boberg &
participants and their retirement plan future will probably have more missing or Associates, 552 U.S. 248 (U.S. 2008),
balances? Some of them will find jobs nonresponsive retirement plan participants established the right for plan participants
with other companies and may want to than in years past because more workers to sue plan sponsors if they think their
transfer their funds to their new employers’ are enrolled in their plans. The Pension retirement account has been mismanaged.
retirement plans. Protection Act of 2006 encourages Therefore, companies must diligently follow
companies to automatically enroll employees ERISA requirements, even for ex-employees’
Others may join a company that does not
in retirement plans and many companies balances.
offer a plan. Many may not find work. Some
participants will decide to roll over their funds are doing just that. A very high percentage
MAY 28, 2010 n
VOLUME 7 n
ISSUE 2 | 3
Reconciliation Act, they are deemed to have
Meeting the obligations of ERISA is obviously difficult satisfied their fiduciary duties and no longer
under bankruptcy conditions when plan participants are responsible for the new IRAs or to monitor
the actions of the custodians.
cannot be located or when they ignore company
There are specific steps a company must
communication efforts. take prior to adopting an automatic rollover.
First, automatic rollovers must be permitted
in the retirement plan documents. Many
They must conduct due-diligence searches, continue to build their accounts on a tax- companies include such a provision when
maintain proper communications of required deferred basis. (Automatic rollovers are the plan documents were first created.
information with all plan participants, ensure available for most defined-contribution Companies that have not done so must
a valid investment election is on file and and defined-benefit retirement plans, but amend their plan documents and notify all
in effect, and manage appropriate death terminating and abandoned defined-benefit participants, including ex-employees, before
benefit distributions to beneficiaries. Failure plans should be handled in connection with embarking on the automatic rollovers.
to do so can lead to fines, penalties and/or the Pension Benefit Guaranty Corp.). The Labor Department has laid out specific
lawsuits. Automatic rollover IRAs were created procedures for bankruptcy trustees to
Meeting these obligations obviously is very by the Economic Growth and Tax Relief follow when attempting to reach missing or
difficult under bankruptcy conditions when Reconciliation Act of 2001, Pub. L. No. 107- nonresponsive participants of plans slated
plan participants cannot be located or when 16, 115 Stat. 38 (2001). It allows companies, for termination.
they ignore company communication efforts. including those in bankruptcy, to roll over The trustees must follow four steps:
Many companies using Chapter 11 as a means the funds in their retirement plans for
missing and nonresponsive participants to a • A certified letter should be sent to their
of reorganizing and staying in business last known address.
might elect to keep their retirement plans custodian that will create and administer an
active during the entire bankruptcy period. IRA in each individual’s name. • If that brings no response, an attempt
Still, they are under significant pressure to The custodian will also attempt to locate and should be made to review plans and
reduce costs including the administering of communicate with those individuals. The employer and administrator records to find
dozens, hundreds or thousands of accounts company can implement this process only information that would help in the search.
for ex-employees. after it has made a concerted effort to contact • Then the beneficiaries listed for their
However, there are other scenarios. While and communicate with these ex-employees. account should be contacted.
in Chapter 11, a company may just decide Automatic rollovers are being used more • If this provides no information, letter-
to terminate the plan to reduce overall frequently by financially healthy companies forwarding services offered by the
expenses. In this case, it must follow to move ex-employees’ plan accounts out Internal Revenue Service and Social
required procedures to notify current and of their own retirement plan, thus reducing Security Administration must be
ex-participants and distribute their funds administrative time and expenses. However, utilized.
based on their instructions. But, again, what these companies can only roll over accounts
Depending on the number of participants
can it do about the problem of nonresponsive with an asset value of $5,000 or less.
and the dollar value of the funds in question,
or missing ex-employees? Rollovers for missing or nonresponsive
the use of Internet tools, commercial locator
What if another company with its own plan employees of companies that are terminating
services and credit reporting agencies are
purchases a bankrupt company and wants their plans have no account value limits.
to terminate the plan of the failed firm and When these ex-workers’ retirement plan
The preferred method of distributing
transfer its newly obtained employees to balances are automatically rolled over
the assets of missing or nonresponsive
its plan? This would be no different than if to IRAs, they are no longer considered
participants after all reasonable location
the original company terminated it except participants in their companies’ plans.
attempts have failed is the use of automatic
for the fact that now a new administrative Assuming the companies have followed
team must address the issues of former and all the requirements stipulated in the
current employee participants.
One solution to the problem of missing or
nonresponsive ex-employees is to implement
an automatic IRA rollover process. This has One solution to the problem of missing or
significant financial benefits for the company
and is also a very effective means of reuniting
nonresponsive ex-employees is to implement an
these individuals with their retirement funds automatic IRA rollover process.
and providing them with the potential to
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THE AUTOMATIC ROLLOVER theirs, but they have no access to them. Searching the online archives of trade
PROCESS The financial institution with custody of magazines and professional journals
the plan assets does not have the authority covering financial and bankruptcy topics
The automatic rollover process begins when
to distribute the funds until a formal is another method. It also pays to review
the plan sponsor or plan fiduciary enters
abandonment-resolution process has been the agendas of upcoming trade shows and
into a written, automatic-rollover agreement
initiated. conferences in a company’s own industry as
with an IRA custodian. This agreement must
This process typically requires about six well as in the financial service industry as IRA
stipulate the initial investment to be used for
months. The assets of the plan must be held automatic rollover firms may be exhibiting or
the transferred funds, services to be provided
by or transferred to the control of a custodian conducting workshops.
to the company and the IRA account holders
by the custodian, plus all related fees and such as a bank or trust company designated Not all IRA custodians will go about the
expenses to be paid by the plan or charged by the Labor Department as a qualified rollover process in the same way. Companies
to account holders. termination administrator. The QTA must or trustees responsible for evaluating
then follow a carefully defined procedure candidates should be certain to as specific
The initial investment must minimize risk,
to wind down the plan and to enable the questions that may relate to their own
preserve principal, provide a reasonable rate
participants to determine what they want to circumstances. Among those questions are:
of return and maintain liquidity. Examples
do with the retirement balances they have in • Is there a minimum-sized account they
include money market funds, interest-bearing
the abandoned plan. will accept? Some will only accept
savings accounts, certificates of deposit and
stable value products. No fee or expense can First, the QTA is appointed as custodian of accounts of $1,000 or more. There
exceed those charged by the selected IRA all the individual accounts in the plan. If the may be missing or nonresponsive
custodian for its other comparable IRAs. QTA is not the current custodian of the funds, ex-employees in bankruptcy situations
the funds are transferred to the control of a with smaller balances that must be
In most cases, regardless of the number of
QTA. At the same time, the QTA must locate included in a rollover.
accounts involved, the automatic-rollover
and take possession of all plan records. • How many rollover accounts can they
process can be completed quickly after the
agreement is signed. Next, the QTA deposits these funds into a accommodate? Bankruptcies may
single, non-interest-bearing account and result in large numbers of accounts
First, the plan sponsor, third-party adviser or
sends notice to the plan sponsor declaring that must be rolled over, but not all
record-keeper must provide key information
its intent to terminate the plan. The plan custodians have the capability to
to the custodian, including each participant’s
sponsor has 30 days to object. If it does efficiently open and administer a large
name, last known address, Social Security
not, the QTA officially declares the plan number of accounts at one time, and
number, birth date and account balance.
abandoned, notifies the Labor Department thereafter initiate the process to find
This should be done as a secure electronic
and indicates it will serve as QTA for the missing participants.
transfer to protect the confidentiality of the
assets. At this point, it also calculates the • How do they go about finding missing
value of the assets at that time and assesses plan participants? The approaches
Next, the funding must be sent to the IRA administration fees. for locating individuals can vary by
custodian. Preferably, this is in the form of
All participants are then notified that an IRA custodian. Some have relationships
a single check or wire transfer equal to the
will be established in their name after 30 with search organizations that specialize
collective value of the account balances. The
days if they provide no other instructions. in sophisticated searches.
IRA custodian then allocates the appropriate
After the 30-day period, funds are distributed • Will the custodian offer rollovers from
amount to each individual, opens up IRA
to those requesting them, while IRAs are Roth 401(k) plans into Roth IRAs or
accounts for each one in their name and
established for missing and nonresponsive allow for conversions from IRAs to Roth
notifies the company that the IRA rollovers
participants. IRAs? The IRS allows IRA account
have been completed.
holders to convert their traditional pre-
WHAT ABOUT ABANDONED PLANS? tax IRA balances into Roth IRAs and
ROLLOVER FIRMS therefore allow their investments to
Several thousand retirement plans are
Fortunately for administrators and company grow tax-free until and at distribution.
considered abandoned each year. Many
management or the bankruptcy trustees,
are abandoned by companies filing for • What transfer and administration
there are several firms that can provide
Chapter 7 bankruptcy protection. technology does the custodian have?
appropriate IRA rollover services. Candidates
Abandonment is a specific legal status that is The transfer of information about
for such assignments can be identified
declared when there have been no deposits to or ex-employees participants and their
by contacting pension, employee benefit
distributions from the plan during 12 consecutive balances, as well as the transfer of
and retirement associations such as the
months, and the plan sponsor cannot be found the funds in those accounts, should
American Society of Pension Professionals
or is unable to administer the plan. be accomplished quickly, accurately,
& Actuaries, the International Foundation
seamlessly and securely.
When a retirement plan is abandoned, it puts of Employee Benefits Plans, the National
all ex-employee participants in limbo. The Institute of Pension Administrators and the • What is the custodian’s experience
retirement funds in their accounts remain Profit Sharing/401k Council of America. with automatic IRA rollovers? This
MAY 28, 2010 n
VOLUME 7 n
ISSUE 2 | 5
includes the number of years providing
the service and the number of rollovers
completed. It also relates to the size
and experience of its client service team,
the accounting and record-keeping Terry Dunne is senior vice president for automatic
capabilities, and the reporting system it rollovers at Millennium Trust Co. in Oak Brook, Ill.
The company works with numerous record-keepers
and TPAs to provide automatic rollover services to their
Predictions on the specific number of plan sponsor clients and as of May has agreements
with about 5,500 plan sponsors to provide automatic
business bankruptcies for 2010 and beyond rollover services. He can be reached at (630) 368-
vary, but there seems to be unanimous 5675 or email@example.com.
certainty that they will continue at a strong
pace. As a result, more retirement plan
administrators and participants should be
able to benefit from the automatic rollover
Defunct banking The policy proceeds are not the property of Downey
CONTINUED FROM PAGE 1
Financial’s bankruptcy estate, and even if they were,
In re Downey Financial Corp., No. 09-13041,
the officers can claim their share, Bankruptcy Judge
2010 WL 1838565 (Bankr. D. Del. May 7,
2010). Christopher S. Sontchi ruled.
U.S. Bankruptcy Judge Christopher S.
Sontchi found that the policy proceeds (the
funds available to pay claims) are not the consistently made subprime loans to At issue is the $10 million available under
property of the estate of the debtor company, borrowers who lacked the ability to repay the an insurance policy written for Downey by
and even if they were, the officers can claim debts. National Union Fire Insurance Co. The policy
their share of them since they were covered They also said they were not informed about covers both the corporate entity and the
under the policy. the extent of Downey’s issuance of “option directors and officers.
The District of Delaware judge addressed ARMs,” exotic adjustable-rate mortgages The executives have asked Judge Sontchi
a controversial overlap of bankruptcy and that allow subprime borrowers to pay as to let them tap the policy proceeds, but the
insurance law concerning whether a bankrupt much as they want during the initial term, trustee opposes that move, arguing that the
company or its officers and directors are first with the unpaid amounts added to the loan policy belongs to the debtor.
in line for what is often one of the firm’s last balance. These loans often end up in default. The judge said the guiding principle in
remaining assets: its insurance policies. The shareholder suits, filed in May and June this type of case is that if the officers and
That question has split federal appeals 2008, made state law breach-of-duty and directors can use the policy proceeds without
courts, but the answer was more simple than federal securities law charges, but both types diminishing the money that the company
usual here, Judge Sontchi said. The corporate of suits centered on allegations that Downey itself might need, they should have access
entity is not named in the case against the had more than $12 billion worth of option to it.
executives and therefore does not need the ARMs on its books and that the executives Since Downey itself is not a defendant in
money to defend itself, he said, so the officers knew these loans were risky. the derivative action, it does not need the
and directors should have access to it. The securities fraud charges were dismissed, money and loses nothing when the directors
In the underlying actions, Downey but the derivative state law claims have now and officers get a benefit they were promised
shareholders said they lost their total been taken over by the bankruptcy trustee, when they signed on, Judge Sontchi said. WJ
investments because the company’s who is pursuing them against the officers Related Court Document:
executives did not disclose that the bank and directors in the name of the company’s Opinion: 2010 WL 1838565
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