Advisors Help Plans Handle Terminated Accounts
When retirement plan participants retire or otherwise terminate employment, they face an important decision: what should they do with their retirement plan account? Their former employers face an equally important decision: should they have a preference among those participants’ choices? Until several years ago, it was clear that most employers hoped they’d take their retirement money with them. Then, a new trend began to emerge, as employers began to indicate they were comfortable with former employees leaving their assets in the plan.
Survey Says?
Was that a real trend? Or were some merely attempting to speak it into existence? Today, one can find a survey to support whatever position one wants to advance. One survey may show that employers want to retain former employees’ plan retirement accounts; another may demonstrate that they want no part of those accounts. Yet another might reveal that employers support their “retirees” leaving their money behind and desire for other terminated participants to take it with them, or that they want all small accounts cashed out but larger benefits left behind.
Areas of Uncertainty
There are two primary theories that purportedly support the desire for the plan to retain terminated participants’ assets:
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Protecting employees’ prospects for a dignified retirement
Under the first theory, it’s not at all clear that plan pricing benefits from retaining terminated participants’ assets, particularly when those accounts are smaller than the plan average. Under the second theory, the delayed implementation of in-plan retirement income solutions and other payout strategies leaves participants without the mechanisms necessary to achieve the desired protection. This leaves us without any certainty that those theories match the current reality.
Areas of Certainty
However, when terminated participants leave their retirement assets behind, we know:
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They still require work. They’re considered participants, which means they must receive all annual and period disclosures required to be provided to participants.
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They become harder to find as time goes on. With each passing year, it becomes more likely that a former employee’s contact information becomes out-of-date.
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They remain included in participant counts. For plans hovering around the plan audit and full Form 5500 threshold, these terminated participants can be the determining factor.
How Advisors Can Help
When we package together the above thoughts with respect to terminated participants who leave their retirement accounts behind, one can neatly conclude:
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The advantages—if any—are hard to quantify or otherwise define
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There are ongoing costs related to administration, participant communications, and potentially plan audit and Form 5500 requirements
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Plan fiduciaries nonetheless retain responsibilities—and the corresponding risk—associated with those participants’ accounts.
Plan advisors are in a unique position to help plan sponsors to develop and execute on a terminated participants strategy. In particular, advisors should:
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Confirm the impact on pricing. It is not enough to assume that retaining terminated participant accounts is categorically good or bad for pricing. An advisor is in the best position to understand how a record keeper/TPA’s pricing structure operates.
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Understand the record keeper/TPA’s approach to small accounts under the mandatory cash-out threshold (currently at $7,000). Is there a semi-annual or annual sweep? Has the plan sponsor chosen an automatic IRA rollover provider for small accounts? If so, has that choice been made in a manner consistent with the DOL’s safe harbor?
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Assist with education of retirees/terminated participants. Human resources professionals have full plates. Brokers circling the parking lots and waiting for retirees have an incomplete information set and likely no responsibility to provide unbiased advice. The plan advisor is a trusted service provider in the best position to help participants to understand their options.
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Implement an IRA rollover strategy. This should address both small account mandatory distributions and larger voluntary distributions. If done correctly, the strategy not only expands the easy-button options for participants, but also makes life easier for the plan sponsor.
Closing Thoughts
If employers get over the hump on in-plan retirement income solutions, the calculus may change. But until such a time, employers appear to be retaining unnecessary risk and responsibilities when their former employees leave their retirement accounts behind. Advisors will be well served by seizing the opportunity to help those employers.
