Distributions: Mitigating Risks and Best Practices

Is it worth being involved with distributions with all the associated risks? An Oct. 22 session of the ASPPA Annual Conference addressed that question and offered some tips on handling them.

The answer, said Kelly Marie Hurd, Director of Plan Consulting, Qualified Retirement Plan Services, is “probably not, but what choice do you have?” Among the risks, she said, are overpayments, paying the wrong person and violation of timing rules.

Signing Authority

Signing authority is one of the important functions that distributions entail. Taking on signature authority has advantages and disadvantages:

• Advantages: faster turnaround time and control over final instructions
• Disadvantages: liability and the possibility that it may be necessary to deal with unhappy participants

An additional factor to consider regarding signing authority, observed Robert Richter, Retirement Education Counsel, American Retirement Association, is that one is a fiduciary if one has authority or control over plan assets. “You don’t have to have discretionary authority to be a fiduciary. If you have authority over plan assets, you are a fiduciary,” he said. And that authority and control is different than control over management or administration of the plan.

Authentication

Another critical function is authentication. “There are sophisticated fraudsters out there,” said Hurd. There are some ways to confirm that one is dealing with an actual participant, although they are not perfect and do entail some pitfalls:

• phone verification of information (although someone who has stolen an identity may have this anyway);
• sending information through company email address (although this is not helpful with terminated participants); and
• delay distribution requests until verification (but recognize that adding time can create stress).

One best practice, Hurd said, is to require that all requests come through a verified plan sponsor contact. But that too has a downside, she noted: “not every client is going to want to do that.” Among the reasons for that:

• it may not go over well with all clients;
• it may mean placing an additional burden on someone who may already have a lot on their plate; and
• clients may have the feeling that they are paying you to deal with the matter.

Paper vs. Electronic

Whether to use paper forms or use electronic means to receive requests “is another issue that has been coming up,” said Hurd. “In our experience,” she said, “paper is more familiar for participants, especially older participants.” She noted that there are advantages to electronic requests; for instance, she said, the fact that online requests have stronger authentication requirements is “a strong reason” for electronic requests. But she also noted that there are disadvantages; for instance, it may be challenging for participants who lack technological expertise to access electronic forms, and electronic notifications may not reach the correct person.

Distribution

Hurd emphasized the importance of knowing the rules, remarking, “You need to know what the rules are in order to be able to follow them.” She and Richter recommended promoting training in a way that makes people familiar with the nooks and crannies of every requirement. Hurd added that her company has made updating everything on the website – an important last step.

Spousal Consent

Hurd and Richter identified a variety of issues concerning spousal consent. One is verification. Said Richter, “There is a risk that when you send a check, if it goes to someone else, the plan may be liable. Things to remember about spousal consent include that it must:

• be in writing;
• provide that no change may be made without spouse’s consent or it must expressly permit changes without spousal consent;
• acknowledge the effect of the election; and
• be witnessed by a plan representative or a notary public.

Death Benefits

Best practices for death benefits include:

• review beneficiary designations when received;
• review the terms of the plan;
• pay benefits quickly; and
• remember that if it looks like there will be competing claims then interpleader may be the only safe way to resolve it.

Hurd also said that there is always an opportunity to remind participants to update their designations.