Do you need to learn how to terminate a defined contribution plan?
If so, read on to learn the basics of defined contribution plans and the steps involved in terminating one.
If you still have questions at the end of this article, feel free to contact RCP Retirement Plan Management Services by clicking here to fill out the online contact form.
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What Exactly Is A Defined Contribution Plan?
Here’s a brief definition — if you already know this, feel free to skip to the next section on how to close a defined contribution plan.
A defined contribution plan is one in which the benefits of an employee during retirement ultimately depend on the amount of contributions to and asset appreciation within an individually-owned account. This is in contrast to defined benefit plans in which employees have no individual accounts, but rather are promised a benefit from the company during their retirement. The value of the benefit is typically based on the employee’s length of service and earnings history.
Like a savings account, the defined contribution account retains a balance at any given time. Assets are invested in various financial vehicles according the employee’s direction. The retirement account value is equal to the investments’ market value.
Differing from the defined benefit plan, an employee has significant control over his or her own plan in regards to how contributions to the plan are invested. Employees are capable of choosing from a different variety of options, which often include the company’s stock, mutual funds, bonds, as well as several other investment vehicles. Examples of defined contribution plans include: 401(k) plans, 403(b) plans, as well as 457 plans.
How To Terminate A Defined Contribution Plan
After it is decided to terminate the plan, its members must be informed by the company.
After such notice has been provided, the administrator is required to perform certain processes within predetermined time periods in order to distribute all assets from the plan.
This process typically takes at least four months to complete but can take several years if plans have complicating circumstances such as missing participants.
Other complications can include a deficit in the plan (for example if the employer owes money to plan participants and the administrator is unable to recover the funds due to bankruptcy) or situations where the plan fiduciary is no longer actively servicing the plan. This is called an abandoned defined contribution plan.
If, upon termination, there are surplus assets (for instance in a forfeiture account) this surplus may be allocated to the employees prior to account distribution.
Getting Professional Help For Plan Termination
The question of how to terminate a defined contribution plan may have a different answer depending on the circumstance of the plan. The fact is that there are a lot of specific details that make each situation unique.
Though we tried to provide information as thoroughly as possible, it is always a good idea to get professional help. This is especially true because it is costly in terms of time and money to keep maintaining a defined contribution plan. Therefore, you don’t want your defined contribution plan termination process to take any longer than necessary.
If you’d like to get individualized attention, please contact RCP Retirement Plan Management Services. Our experienced team will work with you personally to help navigate the difficult regulatory environment and plan termination challenges.
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