When employees leave their jobs, they often leave their retirement savings behind. For plan sponsors, keeping those assets in the plan may seem beneficial, particularly if larger asset balances translate into better pricing or help former employees preserve their retirement savings.
But are those benefits worth the ongoing responsibilities?
In a recent WealthManagement.com commentary, Matthew Eickman, managing partner at Fiduciary Law Center, questioned whether retaining terminated participants’ accounts delivers the advantages employers expect.
Mr. Eickman identified two common arguments for keeping former employees’ assets in a retirement plan: increasing the plan’s purchasing power and helping participants achieve a more financially secure retirement.
Neither benefit is guaranteed. Smaller accounts may do little to improve plan pricing, while the limited availability of in-plan retirement income solutions can make it difficult for employers to deliver on the promise of helping former employees manage their savings throughout retirement.
Meanwhile, plan sponsors must continue to bear the brunt of the administrative and fiduciary responsibilities associated with those accounts.
Former employees with assets in the plan still need to receive required participant disclosures, and maintaining accurate contact information becomes more difficult over time. Their accounts also count toward participant thresholds that can trigger additional reporting and audit requirements.
For plans near those thresholds, retaining former employees’ accounts could result in additional costs.
Mr. Eickman argued that retirement plan advisors are well positioned to help sponsors evaluate these trade-offs and develop a strategy for managing terminated participants’ accounts.
He recommended four areas of focus:
- Evaluate the effect on plan pricing. Determine whether retaining former employees’ assets actually improves recordkeeping or third-party administration costs rather than assuming larger balances automatically produce savings.
- Review procedures for small accounts. Understand how the recordkeeper handles mandatory distributions for balances below the current $7,000 threshold, including the frequency of account sweeps and whether the selected automatic IRA rollover provider satisfies Department of Labor safe harbor requirements.
- Educate departing participants. Help former employees understand their distribution and rollover options so they can make informed decisions about their retirement savings.
- Develop a coordinated rollover strategy. Establish procedures for both mandatory distributions of small balances and voluntary rollovers of larger accounts, making the process easier for participants and plan sponsors.
Mr. Eickman acknowledged that broader adoption of in-plan retirement income solutions could eventually strengthen the case for retaining former employees’ assets. For now, however, he noted that many employers may be assuming unnecessary responsibilities without receiving corresponding benefits.
Plan sponsors and fiduciaries should consider revisiting policies governing terminated participants’ accounts. Working with advisors to assess the financial and administrative implications of retaining those assets, while providing departing employees with clear information about their options, can help sponsors make more deliberate decisions about how those accounts are managed.
