Retirement plans collectively - but unwillingly - hold billions of dollars that plan sponsors have unsuccessfully tried to distribute to former participants.
This often happens because these ex-employees haven't given their prior employers' HR/benefits departments instructions about what they want to do with the balances in their retirement accounts. When the plans try to contact them, they find many previous participants have moved without providing a forwarding address. Others actually haven't moved at all but ignore any communications about their retirement accounts.
The Department of Labor permits plans to cash-out accounts of former employees with less than $1,000 to reduce the cost and the time required to manage them. Sometimes an account's value is only a few dollars. In these instances, the account's assets are converted to cash, the appropriate amount is paid to the IRS and a check for the remainder is sent to the former employee's last known address. This is often when a failure to communicate begins. Some of these checks start returning, marked "address unknown."
Further, many former employees ask their company to close their retirement account and send them the funds, but for some reason the checks are never cashed. Thus, some companies are holding balances representing thousands of dollars in uncashed checks.
How big is this potential problem? A recent study shows that 50% of 401(k) participants leave their account with their ex-employer when they change jobs. Granted, many of them left their accounts purposefully, but any plan administrator will tell you that too many ex-employees leave without providing any guidance.
More money, more problems
Many questions are raised when plan sponsors and service providers/financial institutions find themselves in this situation. Who do the funds represented by these uncashed checks belong to? Who should maintain possession of and be responsible for them? If a bank or financial institution issued the checks, do they control the float? Can the cash be redirected to the company? What happens if the plan is being terminated? Can the funds be escheated to a state? Is there a best practice to resolve this problem?
It all boils down to the stipulation by DOL that when a retirement plan issues a check to ex-employee participants, the funds technically remain part of the plan regardless of how long the check goes uncashed by a participant or a beneficiary. If the check is not cashed or rolled over by a participant, the plan should treat the account as continuing. It should be credited with the appropriate share of future earnings, if applicable, and the funds should remain available to them if and when they come calling for their retirement balance.
Finding solutions
It is pretty obvious that retaining uncashed checks in the plan can create certain problems for plan sponsors and ex-employees alike. The plan continues to incur costs associated with administering these accounts and at the same time, participants remain disconnected from their retirement funds. There also is a fiduciary responsibility to attempt regular communications with all participants, including those represented by the uncashed checks. Should uncashed checks be handled improperly, fines and/or lawsuits could result.
As a result, plan sponsors and fiduciaries increasingly are looking for a solution to this problem. One solution is to rollover funds representing the interest of missing or non-responsive participants into automatic rollover IRAs.
Typically, the IRA provider will open an IRA in the name of the participant and invest the proceeds in an investment designed to minimize risk, preserve principal, provide a reasonable rate of return and maintain liquidity. This is in line with DOL guidelines for automatic rollovers. Examples include money market funds, interest bearing savings accounts, certificates of deposit and stable-value products.
Most IRA custodians will conduct additional search efforts aimed at locating the participants. If the plan did mandatory withholding at the time of the initial distribution, an IRA can be set up for the balance rolled over. Additionally, a plan has the right to reclaim the withholding from the IRS and the IRS refund could be added to the rollover.
Upon the transfer of the funds and the confirmation that IRAs have been established, the plan will have been deemed to have met its fiduciary responsibilities. It is no longer responsible for these funds nor does it have to continue to try to contact the former employees. Typically, these transactions can be completed at no cost to the plan sponsors and only modest costs to the participant.
Dunne, CPA, CFP, PFS, is managing director of automatic rollovers at Millennium Trust Company, LLC. The company works with numerous recordkeepers and TPAs to provide automatic rollover services to its plan sponsor clients.
