Tracking down missing participants: A ‘pain point’ for retirement plan sponsors
Small employers are more likely to keep balances in plans indefinitely, while larger employers are more likely to roll money over to an IRA, according to a Plan Sponsor Council of America survey.
Tracking down missing participants and distributing their retirement plan balances is a headache for plan sponsors, according to the Plan Sponsor Council of America (PSCA), which released survey results, Plan Sponsor Policies on Cashouts, Missing Participants, and Uncashed Checks. The report offers insight into how plan sponsors are handling distribution of plan balances to previous employees.
Plan sponsors have choices in the policies they choose regarding retirement plan balances left behind when employees leave, and recent changes in SECURE 2.0 expanded those choices. Some plans allow employees to keep their money in the plan regardless of the balance, and others force participants to move their money out of the plan, perhaps at different thresholds.
However, tracking down these “missing participants” can be a challenge, and drain time and resources, but it’s a plan sponsor’s fiduciary duty to do so and can be a point of concern in a DOL audit, according to PSCA.
“Tracking down missing participants to distribute small plan balances is a pain point we have heard about from plan sponsors for a long time,” said Will Hansen, PSCA’s Executive Director. “Employers spend considerable time and resources tracking down missing participants and distributing their balances.”
Plan sponsors have a choice in the cashout policy they adopt – they can allow balances of all sizes to remain in the plan, or rollover balances between $1,000 and $7,000 to an IRA and cashout balances less than $1,000.
SECURE 2.0 allows plan sponsors to increase that rollover threshold from $5,000 to $7,000 for employees who change jobs and also allowed for the automatic transfers of balances from one employer to the next through auto-portability. This relatively new concept has not yet taken hold as very few employers have adopted it and only a quarter of respondents are considering it. Large plans are more likely to be considering this option with nearly half of them currently evaluating options, according to PSCA.
Plan sponsors also have a choice in how they handle balances left in the plan from uncashed checks – they can keep the balance in the plan until claimed, place the funds in a forfeiture account, or rollover the funds to an IRA. Plan sponsors can keep the funds in the accounts until claimed — as chosen by 45% of respondents — place funds in a forfeiture accounts (41% of plans), or roll that money over to an IRA (14% of respondents). Small plan are much more likely to keep funds in the plan until claimed and large plans are more likely to put the money in a forfeiture accounts.
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The survey, sponsored by Inspira Financial, looked to assess which of these policies plan sponsors have adopted and other policies companies have in place around these issues. The survey received responses form 236 plan sponsors of varying sizes and industries and revealed that polices tend to vary greatly by plansize with small organizations more likely to keep balances in the plan indefinitely, and larger companies more likely to roll money over to an IRA. Key findings from the survey include:
- A quarter of plans allow participants to keep funds in the plan regardless of the balance, though small companies are more likely to do so (38%), with nearly half of plans cashing out balances less than $1,000 (47%).
- Small plans are more likely to keep balances from uncashed checks in the plan (60%), whereas large companies are more likely to place those funds in a forfeiture account (71%).
- Less than half of plan sponsors (43%) have a formal written policy regarding missing participants.
- A third of organizations use an outside search provider to help track down missing participants.
Small balances in the plan from terminated employees can have an impact in multiple ways. It can become an enforcement issue with the DOL as they check to make sure plan sponsors are getting terminated vested participants their money. Managing small balances also comes with increased costs — plan administration fees, searches, and more. Tracking down previous employees can drain resources and create an administrative burden as your team deals with tracking down these employees and dealing with returned mail.