401(k) Plans at Companies No Longer in Business

A common scenario for failure to claim 401k assets arises when former employees of closed or bankrupt companies are unable to locate their accounts, because their employers failed to provide for the administration of 401k plan assets when they ceased operations.

By statute, a designated individual from the former employer must approve any 401(k) rollover or disbursement. The fiduciary which manages the plan assets cannot release funds to the owner without this approval, which may be difficult to get when a company dissolves, because the designated company manager or other official cannot be found.

Larger companies often maintain administrative staff for months or years after insolvency to handle such matters, but smaller companies may not. About 2% of 401(k) plan assets – roughly $850 million own 33,000 workers – are ‘orphaned’ each year; held by a financial institution without an employer representative to oversee the plan.

Under the current system, the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor must identify a new fiduciary to oversee the plan before funds can be released. This process can be time consuming and costly. Special rules also apply where missing or non-responsive participants in active plans fail to claim their entitlements.

These rules – establishing Rollover IRAs for terminating and abandoned defined contribution plans, and for missing and non-responsive defined contribution plan participants, may cause retirement funds to lose their ERISA-qualified status, subjecting them to state escheat statutes when they go unclaimed.

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