Succession Planning: Have You Talked to Your Client About Planning for Change?

Small businesses with 401k plans generally lack succession plans

Succession planning for any element of a business is becoming ever more important. As noted, by 2029, all baby boomers will be over the age of 65, leaving the businesses they’ve started and/or driven for the last decades in need of transfer or transformation. Succession planning is also vital for 401k plans and their named fiduciaries.


Under Department of Labor (“DOL”) regulations, every 401k must identify at least one fiduciary in the written documents given to plan participants. That fiduciary can be identified either by name or be described by their office. Many plans simply name the sponsoring employer as the named fiduciary. Some plans have an administrative committee or have the company’s board of directors act as the plan administrator or other named fiduciary. Often, a plan’s fiduciaries will include the plan’s trustee and investment manager(s).


Assume the plan administrator is a committee. From a big picture perspective, the plan administrator has  several well known duties: they must see that the plan is administered in accordance with the plan governance documents; they must administer the plan for the exclusive benefit of the plan participants and their beneficiaries; in administering the plan, they must exercise due care and skill; they must diversify plan investments; they must prevent the plan from engaging in prohibited transactions; and value plan assets at fair market value. Additionally, the DOL has stated that it is a fiduciary’s responsibility to ensure that there is a successor in place before that fiduciary leaves. As the DOL has stated:


Fiduciaries who no longer want to serve in that role cannot simply walk away from their responsibilities, even if the plan has other fiduciaries. They need to follow plan procedures and make sure that another fiduciary is carrying out the responsibilities left behind. It is critical that a plan has fiduciaries in place so that it can continue operations and participants have a way to interact with the plan.


On the ground level, plan trustees, along with the plan administrator, may have some level of administrative duties. On investment accounts, trustees can be designated as Authorized Individuals for accessing investment information or other information stored by the financial advisor. Some companies maintain records of plan participants that can be accessed only by those Authorized Individuals.


While many plan administrators or trustees may not be actively involved in investment decisions, their ability to access investment accounts and plan databases warehoused at third party administrator’s (“TPA”) sites could cause compliance concerns. For example, having the wrong people listed as Authorized individuals could make accessing information about plan participants difficult and trip up sending required notices in a time sensitive matter. To illustrate, say a mid-sized company has given access to a TPA’s site to several executives and trustees. Over time, staff changes and trustee turnover could create a situation where few people remain at the company who have access to those databases. This could be especially true where a company changes its business plan or market focus, leading to turnover in the board of directors and key staff. If that company did, as described above, have as its trustees an administrative committee or members of the board of directors, then those individuals may no longer remain at the company. In such a scenario, sending out notices of change in investment, if a fund were required to liquidate for example, could be troublesome. The impact on the company, and importantly, the plan participants could be negative.


An even more confusing situation arises for in the death of a sole proprietor who is the administrator/trustee of a plan. Does the personal representative of an estate have the authority to terminate the plan and distribute the assets? Laws vary by state as to what powers that estate administrator has.  Again, having no successor administrator/trustee in place could negatively impact plan participants.


Other situations can result in employers abandoning their 401k’s, leaving no plan fiduciary to manage the plan, such as the employer ceasing business operations without a formal liquidation proceeding.


Other, more positive scenarios exist that could result lack of identified fiduciary (and therefore lack of authorized individuals) as well. One example might involve a merger of two companies, where the successor company keeps its 401k, but the controller or other financial officer assigned to oversee the day to day aspects of the plan is given a new position after the merger. Occasionally, mergers (or bankruptcies) result in plan custodians, including mutual fund companies or banks, holding plan assets with no authority to distribute the assets. In scenarios where assets are what the DOL refers to as “abandoned”, certain regulations would allow the asset custodian, i.e., the bank, to distribute the funds.


If trustees or former staff are the only Authorized Individuals on an account who can access the databases containing information about plan participants, it stands to reason that there could be a variety of administrative problems caused by not evaluating the growth of the company or the sustainability of an individual as a trustee.  Planning for succession or replacement could be an important issue to raise with clients.


This could be even more vital in the case of businesses with S Corporation or status. Small businesses with 401k plans generally lack succession plans. While research suggests that only 18% of small business have 401k plans, almost 60% of small businesses lack a succession plan. Combining those two data points results in a fair number of small businesses with potential succession problems. As noted above, the death of a small business owner/sole proprietor has the potential to create a nightmare for the estate administrator if that small business owner is the only plan administrator/trustee on a plan. It’s worth remembering that “small business” doesn’t always mean small plan. Small businesses, according to the federal government’s Small Business Association, are those that fall within the definition of “500 employees for most manufacturing and mining industries and $7.5 million in average annual receipts for many nonmanufacturing industries.” 


Key elements of crafting a discussion with clients about succession planning including staying positive but specific. Focusing on the points where a company could need to change their plan administrator or trustees resulting from growth or merger can help identify where succession plans are needed. Other elements of succession discussions include planning to have a series of discussions over time with the client. Additionally, if your client has a risk manager, meeting with that individual to discuss succession planning could be helpful.



[1] Department of Labor, “Meeting Your Fiduciary Responsibilities,” February 2012, p. 11. Available at:

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