It’s a question I get asked all the time – and this week, I asked NAPA-Net readers what their plan sponsor clients think – and do – when it comes to the balances of former participants.
Over the years, I’ve read – and heard – conflicting opinions. The “rational” side seems to argue that you should encourage participants to keep their money in the plan, particularly longer-term workers, since those (typically) larger balances can help lower plan fees, or at least provide more balances to spread fees over.
On the other hand, I’ve rarely encountered a plan sponsor who wasn’t (painfully) aware of the complications (and costs) that result from having to keep up with ex-employees (particularly as regards delivering all the required notices).
Plan Sponsor Perspectives
Realizing that there can be a variety of experiences across clients, we asked readers how their plan sponsor clients – generally – viewed ex-participant balances. A plurality (45%) said those clients encourage those ex-participants to take their balances with them, while nearly as many (36%) said they don’t really encourage them either way. Just 1 in 10 (11%) said they encourage those ex-participants to leave their balances in the plan – while the rest– approximately 7% – “don’t really seem to give it any thought at all.”
“Our clients have mixed feelings about this topic.”explained one reader, “but the majority would prefer to have them leave their balances in the plan because they understand the benefits of an ERISA covered plan with institutional pricing and free or low-cost asset allocation solutions. We have several clients that have Retiree Benefits which allows them to speak to one of our educators about their account and financial needs. However, there are those non-paternalistic clients with high turnover that are indifferent to whether the ex-employee leaves their balance in the plan.”
“Most plan sponsors don't care if participant keep their assets in the plan or take them with them. Plan Sponsors tend to care more if the number of terminated balances is causing them to do an audit. If this is the case the plan sponsor will typically run a mailing campaign to let participants know they have the option to move their money if they wish. Built into 99% of the plans we advise on, the plan design include the force out rule for account balances under $5k.”
“Better for the employee (for the most part) keeps assets in the plan which allows fees to decrease over time (since their humble advisor stays on top of that),”explained another.
“If the balances are over $5K they can't force them out and it is an administrative burden to contact participants once they have left the company so our plan sponsors just let nature take its course. We have a few that go out of their way to encourage participants to roll out their balance when they leave, during an exit interview or filling out final paperwork, etc., but that is the exception.”
As for the reasons to discourage ex-participants from staying in the plan, one reader explained, “Lost participants, notice delivery, potential liability with former participants in plan, per head fees for TPA work (costs.).”
“They don't want to have to keep up with the employee and they don't really want to have a relationship with a person that purposefully (or not!) left the company.”
“Lawsuits start with terminated participants. Recent litigation has come down market, I recently saw a $ 9 million plan get sued for revenue sharing.”
“They don't necessarily encourage them to move their funds per se, but the terminated participants are provided their four options (leaving assets in plan, roll into new employer's plan, roll into IRA, cash out funds). This usually makes most terminated participants aware that they had a balance that they forgot about.”
“For the most part, most plan sponsors force out the ones they can and don’t worry about the rest. A few are very adamant about getting encouraging ex-participants out of the plan. Plans that hover around the audit threshold are more aware of the situation.”
“They do not want to keep track of them for notices. They do not want the fiduciary liability on terminated employees.”
“Most of our plans have a cash-out procedure for those balances under $5,000. As for the over $5,000 most usually remain until the individual reaches retirement or otherwise runs into a cash flow issue.”
“We encourage them to transfer or pay out small balances. We think of small balances as under $30,000. If the participant is close to retirement or retiring, we encourage them to stay in the plan and set up a long term payout/distribution from the plan. It is an expense to the record keeper but is something that they are increasingly being asked to do.”
“Leaving old 401k balances gives employees opportunities to not keep beneficiaries up to date. As a matter of fact, a client I visited today recounted how on his first day in HR he had to pass an old 401k account to an ‘EX’ wife.”
“We have clients that do both. However, more are wanting the larger balances to stay in the plan.”
“Don’t want the baggage, don’t want to keep track of the people, don’t want to be connected to ex-employees as a fiduciary.”
“Ideally, they would like their old participants ‘off their books’ but don't try and push them out. We help prepare letters for them to send to former employees making them aware of their options. Main reason why we want them off the books: many times, they relocate multiple times post-termination. Once we can no longer find them, it becomes an ‘irritating’ process sending notices and/or assisting with rollovers as-needed. Side note: for almost all of our plans, we have ‘deminimum balance’ force-outs. Anyone under $1k gets their balance cashed after receiving notice and between $1k-$5k gets a letter. If they do nothing, we set up default IRAs. Same reasons as above.”
“Often the retirement plan share cost is more expensive than A shares, often the cost of a fund IRA is less than the admin charge for leaving it in a 401k plan and the cost (time & money) to the plan sponsor to send required disclosures.”
“Most clients lean toward encouraging smaller balances to leave, primarily due to notice requirements and a desire to raise the plan’s average account balance for pricing purposes.”
“DoL has focused recently on terminated participants with a balance. Accounts left in the plan for a long amount of time tend to become ‘missing’ participants. Difficulty communicating with participants for required plan notices.”
As for the action that respondents recommended to those plan sponsor clients, responses were nearly as diverse. A clear plurality (43%) noted that while it depended on the plan and the plan sponsor, they mostly dissuaded them from keeping those balances in the plan, while about half that number (21%) said they encourage them to encourage ex-participants to take their balances with them. That said, nearly as many (17%) don’t really encourage/discourage either way, 15% acknowledge that it depends, but mostly encourage keeping those balances in the plan, and the rest (a slim 2%) encourage them to keep those balances in the plan.
“I encourage participants to either roll their money into their current employers plan or roll into an IRA,”explained one reader. “The problem many participants face as they go from employer to employer is that when they are finally ready to consolidate it’s a very cumbersome process or even worse they have a hard time locating where their old 401k money is. If participants choose to leave their money in their former employer’s 401k plan, I encourage them to always keep their contact information up to date and to always make sure they have online access to their accounts.”
“We see it as a win, win, win – for the employer, the employees and the terminated employees.”
“Lost participants, notice delivery, potential liability with former participants in plan, per head fees for TPA work (costs). We do NOT put AUM and Advisory Revenue first... it is whatever makes the most sense for the Plan.”
“It’s really hard to track people down as time goes on, and the plan sponsor ends up with a lot of returned mai.l.
“We talk with participants to see what their situation is and the costs/investment options associated with moving versus keeping the dollars in the plan.”
“We do everything to get balances out of the plan. Why add the risk?”
“We do not encourage one way or another, but we educate them on their options.”
“We want small balances out and large balances to stay in. We contact participants and encourage them to roll their money into their new 401(k) plan. If they have not found a job or are not going to go back to work, we suggest that they roll small balances into an IRA rollover.”
“Most plans are still priced by recordkeepers on an asset basis – and for those folks term’d with larger balances obviously their existence helps the plan overall. And, although in theory you would want to get rid of the person with a $5,001 balance, there is concern about any appearance of different treatment among those with ‘small’ vs ‘large’ balances left in the plan. Total counterpoint: for plans with recordkeeping priced on a per head basis it is a totally different paradigm & discussion wherein, in theory, sponsor wants all of those folks gone – but, in practice, often the soft cost of encouraging them to withdrawal is less than the actual hard cost savings.”
“Our clients are small. They aren't in business to maintain benefit plans for ex-employees. They have other things to do. The passage of time does not make finding former employees easier.”
“Difficult for plan sponsor to keep track of terminated participants and they are responsible to make sure required notices get delivered.”
“We install a cash-out administrative policy and have the plan sponsor adopt an IRA rollover product and we force out small balances annually where possible.”
“Don’t encourage or discourage, but do emphasize the importance of enforcing the plan’s automatic cash-out provision in order to reduce the number of missing participants and increase average account balance size, since the latter has a positive effect on plan pricing and the former is a rather significant compliance issue.”
“My primary consideration is what’s best for the participant. In an ideal world, job changers would move their balances to their new employer’s plan, assuming that plan is just as good. For retirees, it depends on their personal income planning needs.”
“It depends on the plan sponsor philosophy. We have plan sponsors on both sides.”
“The fiduciary liability that comes with having to keep track of all of the terminated participant balances is too high not to mention the labor of having to make sure they get all of the required notices. I would never recommend my plan sponsors proactively keep terms in the plan.”
Participant Recommendations
As for what they recommended to participants about either taking their balances out of the plan, or leaving them “behind”:
34% - don’t really encourage/discourage either way
26% - encourage participants to take their balances with them
19% - depends on the plan, but mostly dissuade them from leaving the balances in the plan
15% - depends on the plan, but mostly encourage them to leave the balances in the plan
2% - encourage them to leave their balances in the plan.
“I encourage participants to either roll their money into their current employers plan or roll into an IRA. The problem many participants face as they go from employer to employer is that when they are finally ready to consolidate it’s a very cumbersome process or even worse they have a hard time locating where their old 401k money is. If participants choose to leave their money in their former employer's 401k plan, I encourage them to always keep their contact information up to date and to always make sure they have online access to their accounts.”
“I explain pros and cons like costs, depends on the participant and their near term needs. Usually they like to consolidate if they are moving to a new employer.”
“I encourage participants to consolidate accounts if it makes sense from a fee and expense standpoint. For example, if they came from a larger company that may have a lower cost plan, I help them navigate what is the best option for them, sometimes comparing fees of the new company v. prior employer.”
“It depends on the plan. If it has very low cost due to economies of scale compared to their new employer, then leaving it may make sense, especially if it is a large balance. On the other hand, if the person is younger and has a smaller balance, it may be easier to roll it to a new employer's plan even if the cost is slightly higher. It is really on a case by case basis.”
“We review the distribution options (Lump-sum vs installments) and what distribution fees from RK may be. Often times moving all money into an IRA can be the best course of action (and no, the IRA is not with our group).”
“Most workers change jobs an average of 5-7 times in their career (more if they’re a Millennial) so I advise them to have a ‘parking spot’ IRA for those plans when they leave so they can keep it all together.”
“Roll over to a discount IRA is typically the best solution. In the rare occurrence that the stable value is valuable, we would encourage a rollover to the new employer. Index funds are inexpensive regardless.”
“Employees move around more in their careers now than ever before and they move from house to house. I think it’s important they take the money with them and consolidate. Should something happen to the participant, the spouse or relative has one account to deal with instead of multiple ones in multiple places. Worst is when they truly forget they have the account balance outstanding somewhere.”
“We don’t want the participant to take a payout because of taxes and penalties. We will get on the phone and or email and discuss their options. We don’t want to have the Plan Sponsor absorb costs but we look out for the participant first.”
“Want to be perceived by our clients as ‘neutral & impartial’ in our participant recommendations: therefore we lay out the real-world practical pro/con of either course of action.”
“We work with small plans. The last thing you want to do is be at the mercy of your former employer in terms of what you can invest in and when you can take your money out. If you have a chance to get your money out, take it right then and there.”
“It comes down to two things: Does the participant need all of their stuff in one place? What are the fees in this plan compared to an IRA/new employer plan?”
“We present a balanced approach – on one hand, many participants will benefit from institutional pricing and regular investment monitoring but the plan sponsor retains fiduciary liability over those participant balances. At the plan sponsor level, increased assets could result in more favorable recordkeeping/admin costs. On the other hand, participants who are comfortable managing their own portfolio or are in a smaller plan may have a better fee experience outside the plan. They’ll have broader access to investment advice and investment options (albeit retail options, typically). For smaller plan sponsors, they may wish to encourage term vested to move along to stay under audit level.”
“Obviously it depends on what is best for the individual participant, but in general most former employees usually want to aggregate their retirement assets in one place.”
Perspectives on Ex-participants
Ex-participants come in at least two flavors, of course; those who terminate employment, and those who retire – and so we asked readers if their plan sponsor clients view those ex-participant balances differently.
36% - There is no interest in retaining either – “ex” is “ex.”
36% - There is an interest in retaining retiree balances, but not terminated workers.
19% - There really doesn’t seem to be any attention to this at all.
9% - There is an interest in retaining both.
“Often times Plan Sponsors have a paternalistic relationship with their employees,” explained one reader. “Retirees usually have been with the company for a long time and they want to make sure their retirees are cared for. In general, when a participant is getting ready to retire we tell them that they have all the time they need to decide on how they want to handle their 401k plan. Most retirees whether they have small account balances or large account balances are already engaged with a Private Wealth Manager whose by and large encouraging them to roll their money into an IRA under their management. We as the plan advisor do not have any private wealth management clients and feel is a conflict of interest to take on individual clients from our retirement plan clients.”
“With smaller employers, it helps to retain the larger balances of retirees. There is also an easier line of communication vs just a terminated employee.”
“If the employee was a long time valued worker, then the plan sponsor generally wants to help this participant in any way. If the worker left on bad terms there is an inclination to have them take their money.”
“There’s not much of an interest in retaining the balances of retirees, just if there's a negative impact on the plan as a whole if they roll their millions out. Ex is ex. Plus HR doesn’t want to have to deal with their beneficiaries later in life and are not equipped to handle situations where there is dementia or other types of cognitive impairment.”
“A few clients are interested in retirees but in reality, the HR and CFO turnover is so frequent, there is little or no relationship.”
“Retirees are generally encouraged to stay in the plan and set up monthly distributions. Terminated Employees are terminated for 2 reasons: lack of work or for cause. ‘Lack of work’ terminations are given the options that a retiree is given. ‘For cause’ terminations are generally encouraged to rollover the money into an IRA.”
“To be clear: this interest in retaining retirees but not term’d workers is not about altruism – it is about those retirees having bigger balances that help to subsidize costs in an asset-based recordkeeping platform!”
“Some plan sponsors can take a very parental approach, and therefore don’t force out the participant.”
“Keeping up with the ‘ex’ again is still a pain.”
“If they choose to retain balances, retirees are more desirable. They ended on good terms rather than terminated, which can oftentimes be unhappy.”
“It really varies from company to company. From a cultural standpoint, some have strong relationships with retirees and this is one way to stay connected.”
Other Comments
As you can tell, readers were very generous with their comments this week on this important topic –here’s a sampling of some others:
“Rollovers can make sense if they are part of a broader financial plan. We don’t recommend rollovers and will not accept them in isolation of their other assets and without a financial plan. Many of our clients are concerned about the solicitation of rollovers and are very hesitant about allowed plan providers to cross-sell or use commission-based salespeople to conduct their education meetings.”
“We always want to make sure current participants and former participants understand their options. Recordkeepers try and catch a lot of IRA rollovers and we remind employees throughout their career during our education meetings that they have a variety of options – especially where IRAs and recordkeepers are concerned.”
“We always encourage plan sponsors to setup automated rollover processes with the recordkeeper – ideally to flush out as soon as administratively feasible post termination of employment. We also provide templates for plan sponsor communication to those with balances over $5k.”
“If it makes sense to consolidate and make life easier, then rollovers are encouraged... if their money is with a massive low cost plan, then they are encouraged to look at the pricing difference and make their own determination.”
“Rollovers are typically encouraged into the plan sponsor’s retirement plan. Mostly my advice is based on the participants situation and what is best for him/her. I find, and there are studies to support these findings, that rolling balances over to a new employer’s plan is best for the employees. Simplifies the number of accounts he/she needs to track and helps them know better if they are on track, especially with a lot of recordkeepers now providing income in retirement projections. If an employee retires we take a look at the total account balance and determine how the money will be used. Will the employee be consolidating with a financial advisor, is the account going to be used mostly for emergencies in retirement or is the account going to supplement their retirement income? What investment strategies are available in the retirement plan for the decumulation phase? What are the fees? All of these factors need to be considered when making a recommendation.”
“Litigation, litigation, litigation. 401k providers have started a narrative that the record keeping fee schedules will be impacted if terminated roll out. In fact, a few large employers have refused one-time bulk wires during M&A (asset sale) under the idea that it would increase record keeping fees. I have never seen a division spin off cause a higher record keeping fee for an employer.”
“I believe it’s most important to educate about their options. Whether it’s rolling the assets in or rolling the assets out it's important to review the plan expenses, fees, options, etc. and comparing where the assets are coming from and going to (if it’s a consideration) and communicate the pros and cons to those options.”
“Retaining assets in the plan is a pain... too hard to track this mobile society.”
“We do see more rollovers into a current employers plan from a prior employer plan which I think is due to trying to keep better track of their money. The fact that most rollover money is available upon demand helps the employee feel like he/she isn't ‘locked’ in.”
“Our plans are the least expensive way for a participant to save for retirement. The costs on our plans are generally well under 1% and an IRA rollover is typically 1-1/2% to 2% so there are significant savings to staying in our plans. Keeping fees down is essential to long term saving and we explain that to retirees and terminated employees.”
“We are massive proponents of getting term’d small balance swept out. Pair of thoughts on that point: 1. more recordkeepers need to do this routinely & automated: far too many make it a manual process that the sponsor has to be involved in hands-on. 2. the threshold for what constitutes a ‘small’ balance is in desperate need of being indexed for inflation – the current $5,000 is simply too low!”
“Rollovers from plan to plan are entirely too difficult and cumbersome, with way too many opportunities for errors!”
“We encourage participants to leave their account in the plan as long as they want. If their new employer sponsors a 401(k), we look at the investments offered, and if reasonable will encourage a rollover to the new plan. Easier to manage one bucket of money than two. Some plan sponsors do not want terminated employees assets left in the plan, others have added systematic withdrawal options to allow ex employees to continue in the plan.”
“I think that since advisors get paid on assets, there is no incentive to help people move money out of the Plan, even when it is in everyone’s best interest. Further, I think that the platforms which actively sell their IRA or annuity product to terminees are conflicted and this practice should be disallowed.”
“Maybe the answer would be different if we were the financial advisor, but as TPA our advice is pretty much ‘get out of the plan and stay tax-deferred.’ Of course we can't encourage any specific IRA, but we can encourage a rollover in general (which probably still gets us into fiduciary hot water somehow, but whatever).”
“1) Indirect rollovers would be outlawed if I ruled the retirement plan universe; only direct rollovers would be permitted. 2) It's amazing how many participants don’t even understand the basics of their distribution options; participants who speak with me often change their minds about what they do, simple because they did not realize that there were alternatives to what they were doing until I explained it to them!”
“An abundance of small ex-employee balances is a burden to the plan sponsor and can impact pricing for all participants.”
“Some paternalistic plan sponsors have seen participants make what they deem to be financial decisions that may be counter to the participant’s best interests and want to prevent that for future participants.”
“Rollovers are a pain for plan participants and due to a lack of an consistent or automated way of rolling over accounts between plans, many participants will continue to either leave their money in the plan or take a lump sum distribution.”
“Investment management and recordkeeping fees are keys considerations. The plan size and employer status (i.e. thinking about terminating the plan in a few years or so) are other considerations. Also, some clients choose to charge separated employees a fee to remain in the plan. This is becoming more prevalent these days.”
“It is important to assess each participant’s unique situation when providing a recommendation on what to do with their old 401k plan balances.”
“Unlike with death, you can take it with you when you leave your employer. Please do. Don’t be lost.”
Thanks to everyone who participated in this week’s NAPA-Net Reader Poll!
