A recent survey of large plan sponsors finds that, for every employer that prefers terminated participants leave the plan, there are more than six that want them to leave their balances behind. But that’s not exactly been the experience of NAPA Net readers.
As it turns out, just 5% answered unequivocally “yes” – while 16% responded “yes, but only above a certain amount.” About 10% said “most do, some don’t.” On the other hand, 38% said “no,” and another third said “some do, most don’t.”
Ah, but has that sentiment shifted recently? Again, for most apparently not. Half said “no, they’ve never wanted to keep up with these accounts,” though 13% said that there hadn’t been a shift because “they’ve always been willing to keep them.” Not that some shifts hadn’t occurred. Roughly 24% said that while in the past plan sponsors hadn’t wanted to keep the accounts, now they did – and 13% said that while they had been interested in keeping them previously, “now they don’t.”
The rationale for keeping these accounts was, of course, varied. The most common (by far – cited by 58%) was a desire to boost assets/reduce fees. Other reasons cited (more than one response was permitted) were:
22% - general ambivalence
19% - path of least resistance/communication at termination
17% - pride regarding plan design/fund options
8% - general paternalism
“They *reluctantly* acknowledge that the ones that remain over $5k boost the plan assets for fee reductions,” noted one reader.
“The number one reason they encourage former employees to keep their money in the plan is their extremely low cost investment lineup (w CITs and Stable Value they cannot receive in a retail environment). Also, many participants in rural communities don’t have access to fee-only financial planners, and keeping them in the plan helps protect them from the wolves,” explained another.
“Most don't even think about the fee ramifications, as far as I can tell, but occasionally someone does bring it up,’ observed one reader.
“I think many realize that the buying power in a qualified plan is potentially greater than another vehicle,” commented another. “So many that see the plan only as an accumulation vehicle have realized that they can provide distribution options to participants that may be of more benefit to participants in retirement. I think many plan sponsors are missing the other half of the equation.”
“Close to paternalism, but more a lack of desire to be heavy handed,” said another.
On the other hand, one reader noted that, “Clients think that keeping terminated participants in the plan boosts plan assets and reduces fees. But in practice, having 10 to 30 terms with small balances in the plans doesn't move the needle as to boosting assets enough to reach new breakpoints. It just increases their fiduciary liability to track and provide required notices to these former employees.”
Their inclinations notwithstanding, I asked readers what they recommended to those plan sponsor clients. Once again, the responses were… varied:
39% - to keep the ones above a certain amount
34% - to let them go
22% - don’t encourage them either way
5% - to keep them
By the way, as a point of reference, among this week’s respondents, 71% said they hadn’t “left” behind an old account, 21% had, and the rest “hadn’t yet been an ex-participant.”
We also got some interesting reader comments on the subject – here’s a sampling:
“The lost participants become a big problem over time that eats up time and resources.”
“Our clients understand that it can help drive pricing down (and in general, our clients have generous plans so the term accounts are sizable). We’ve pushed the envelope further by now allowing terminated employees to borrow from the plan, something they can't do if they roll to an IRA.”
“I think there is a lot of education needed on distribution options, installment payment conversations seem to be picking up but many sponsors and participants are unaware of the options, how do I set it up? What does it cost? How do I get my money, etc.? I am hoping recordkeeper technology will help with this process, e.g. apps, ACH options, streamlined tax notifications, etc.”
“Fiduciary Investment Advice that’s offered by the Plan can be less expensive than a retail investment advisor. This can be an additional reason that sponsors want to keep retirees in the Plan.”
“The sentiment evolves to "get them out of here" as employers become more aware of their on-going responsibility to terminated employees that still have a balance in their plan.”
“Cash-out rules, and keeping up with mandatory distributions is something many plans do not utilize. They have the provision written to cash out participants under $5,000, but don't have the IRA established to facilitate the rollover. Particularly those plans that are bundled, they either need to establish their own IRA (and bear the burden of continuing to locate missing participants), or pay another service provider (like MTC) to accept the rollover assets. Also, many plans that cut checks for participants under $1,000 are just creating stale dated checks (not to mention subjecting the distribution to mandatory withholding). The likelihood of issuing a check that’s going to be stale dated is worth evaluating what your process as a Plan Sponsor looks like, and what services providers you can engage to reduce administration.”
“Ex-participants have no upside, with perhaps the exception of plans with fixed base fees and large ex-participant balances. Ex-participants pose and administrative burden; keeping track of addresses, annual disclosures, deaths, etc.”
“Most employers do not want to even see the names of their previous employees, let alone have to send them statements, notices, and reports. We strongly encourage clients to distribute benefit to former employees as soon as possible.”
“The biggest reason we encourage them to have participants take their accounts is because people move so much and it’s too easy to lose track of them. They do not keep their addresses up to date.”
“The ideal plan design would distribute all participant account on separation. However, ERISA is a factor in dealing with participant accounts. Simply presenting separated participants with their distribution options is the only way to go under ERISA.”
“I encourage my clients to force out terms with less than $5,000. It reduces their fiduciary liability as they no longer have to provide required notices to former participants that move and don’t bother to inform their former employers.”
“The SSA (if they're not on furlough) should start paying attention to those optional code Ds. It’s hard to prove to a participant that they were paid out 20 years, six recordkeepers and five TPAs ago.”
“The risk of keeping them is not worth any potential rewards...”
“We’d prefer that all former employees take their money out of our clients’ plans. In my opinion, the majority of those that don’t take their money out of the plan typically don’t know what to do with their money or are confused by the forms and notices, so they do nothing. Others are simply lazy.”
Thanks to everyone who responded to this week’s NAPA Net reader poll!