Using rollovers to clean out a cluttered 401(k) plan can be a quick, painless way to help sponsors cut administrative costs and control risk.
Financial advisors have focused for years on trying to persuade individual departing employees to shift cash from 401(k) plans and other defined contribution plans to individual retirement accounts, to take advantage of the flexibility that moving the cash into an IRA can offer.
Now, retirement plan consultants and others are putting more energy into telling plan sponsors that encouraging rollovers also can help them.
Some plan services vendors may think every retirement plan dollar under management is a beautiful dollar.
But benefits managers who are paying $35 to $75 per year per plan participant may find that reducing the number of former employees in a plan is a great way to conserve cash, according to Jim Langenwalter, chief marketing officer of RolloverSystems Inc., Charlotte, N.C., a company that sells rollover automation services to plan sponsors and administrators.
In recent years, the typical plan sponsor found that about 30% of plan participants were former employees. Because of the recent wave of layoffs, “those numbers are now much higher,” Langenwalter says.
Total annual savings can range from hundreds of dollars for small, relatively new plans to millions of dollars per year or more for large, well-established plans.
Reducing the number of participants also can reduce the amount of fiduciary risk resulting from the possibility that a critical notice sent to one litigious former-employee-plan-participant may go astray, and it can reduce concerns about serving the needs of former-employee participants who may have very different needs and interests than active-employee participants, Langenwalter says.
Former employees will not be getting matching contributions, they likely will not be getting the same retirement planning lunch seminars and other education and support services that active employees are getting, and they might be quicker to sue over concerns that active employees might be more willing to handle through other means in the name of maintaining good relationships with their employers.
In July 2008, for example, the U.S. Supreme Court ruled in LaRue vs. DeWolff, Boberg and Associates Inc. et al. that former employees can sue a plan fiduciary if the fiduciary fails to invest the plan assets as the employees request, and that failure ends up hurting former-employee plan participants.
Employers still must keep former-employee participant balances over $5,000 until the employees give other instructions, but, in 2005, the U.S. Department of Labor and the Internal Revenue Service encouraged plan cleanups by permitting employers to set up automatic rollover programs for former employees with balances of $1,000 to $5,000 who do not ask to be cashed out and do not provide other rollover instructions.
Former employees can cash out former employees with balances under $1,000 by sending them checks.
The bank, mutual fund company, insurer or other financial services company that is serving as a plan’s recordkeeper may help persuade departing employers to roll over 401(k) plan assets into the recordkeeper’s own IRA program.
That might be a good option for some employers.
Other employers may prefer to work with another money manager, or a brokerage company, or a Web services company that can offer access to a range of IRA options.
One reason for plan sponsors and their advisors to offer rollover assistance services is to help former employees with small balances find a loving home for their assets.
“These people are the people who need the most help,” but they rarely get help from individual advisors, Langenwalter says.
Despite the penalties imposed on individuals who take withdrawals, “we have seen a dramatic increase in cashouts,” Langenwalter says. “That will create a larger problem in the future.”
Employers also need help with finding the holders of the accounts with balances under $1,000, Langenwalter reports.
Employers “are getting drawers and drawers of these stale checks” from former employees who cannot be located, he says.
Many workers have small balances in several different retirement plans, and one way rollover consultants can protect workers against the risk that service fees will eat up all the assets is to consolidate the balances in a single account, he explains.