What should plan sponsors do about inactive retirement accounts?

Managing small retirement accounts for employees who no longer work for you can be time consuming, and labor intensive, but there are some employer benefits to keeping past employees’ 401(k) accounts on your books or having new employees roll their past retirement accounts into yours.

If employees have all of their retirement savings in one spot it “helps them set retirement goals and meet them, which will benefit the employer,” said Meghan Murphy, a director at Fidelity in Boston.

If a new employee decides to rollover past accounts into their new account “it is a good time to engage with an employee,” says Murphy. “ If you can crack that engagement nut and get them in the plan and paying attention, it is a good opportunity to send them a message about the right saving rate or putting a plan in place for meeting retirement goals.”

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Most employers don’t want to continue to manage balances under $5,000 for employees who no longer work for their company. It becomes a headache to manage such a small amount of money. But larger amounts can boost an employer’s plan. Additional dollars can open up investment opportunities for the entire retirement plan, allowing the 401(k) to purchase lower cost institutional shares instead of higher cost retail shares, she added.

Currently, employers have the right to transfer amounts under $5,000 out of their retirement plan and into an individual retirement account for their former employees. A recent study by the Government Accountability Office found that greater protections are needed for these “forced transfers” of inactive accounts because in its research it found that “fees outpaced returns in most of the IRAs analyzed” so account balances tended to decrease over time.

The GAO asked Congress to consider alternatives investment options employers can utilize in these situations that still allow them to get the money out of their plan but don’t erase the account balances employees have left.

Also see: The risk of inactive retirement plan participants

Many employees don’t know what to do with the money they’ve left behind so they ignore it or cash it out.

“It is a real opportunity for a new employer to communicate with their employee, ‘hey, even if it is a small balance today, there’s a benefit in rolling that over where it will grow exponentially throughout your career,’” Murphy says.

The GAO recommends that Congress or the retirement industry come up with a better way to track participants’ many retirement plans. The organization reviewed the policies of other countries and found that many require orphaned accounts to be consolidated into money-making investment vehicles, even without the participant’s consent. Others keep a registry that give participants a single, online resource where they can keep track of their accounts.

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“Participants in the United States, in contrast, often lack the information needed to keep track of their accounts. No single agency has responsibility for consolidating retirement account information for participants and, so far, the pension industry has not taken on the task,” the GAO stated.

From an employee perspective, “they may have access to lower cost funds in a 401(k) structure than if they go to an IRA,” Murphy says. “Certainly, cashing out should be the last option.”

GAO recommendation

GAO recommends that Congress consider “amending current law to permit alternative default destinations for plans to use when transferring participant accounts out of plans, and repealing a provision that allows plans to disregard rollovers when identifying balances eligible for transfer to an IRA.”

Currently, employers can force out accounts with $20,000 in them because less than $5,000 of the account was accrued through their company, the GAO said. Most of it was a rollover from a previous company.

Retirement plan sponsors should consider bringing up the topic of prior account rollovers during new hire benefits sessions, Murphy says.

Also see: Greasing the skids on 401(k) rollovers

“It’s a good opportunity to say, ‘don’t forget about your old 401(k). Let me remind you of your options. Consider rolling over to our plan,’” she says. “Most employers are fiduciaries so they need to give all the options.”

Fidelity works closely with employers to design messaging and enrollment materials for benefits managers to give to employees, “so we are able to coach and guide employers to send the necessary messages depending on the employer’s wants and needs and how they normally deal with their employees,” Murphy adds.

Paula Aven Gladych is a freelance writer in Denver, Colorado.