The question over whether it is better for a plan sponsor to keep assets from retired or departed employees (legacy participant accounts) in a defined contribution (DC) plan like a 401(k) or whether to push them into a roll-over vehicle like an IRA is relatively simple…the employee is the one who ultimately decides. Only when a participant account balance is under $5,000 can an employer force a participant out of a 401(k) plan.
OK, so now that we have cleared-up the question of the decision-making process, let’s turn our attention to the pros and cons of “in” versus “out” when it comes to so-called legacy participant accounts.
The “Pros” of retaining legacy funds “In” the DC plan
There are some benefits to keeping funds within the DC plan after employees have left the company or have reached retirement age. Notwithstanding the Required Minimum Distribution (RMD) amounts (see RMD calculator), holding legacy account funds boosts the assets in the fund. In many cases funds with higher asset levels enjoy preferred status with regard to fees and services. So by allowing legacy funds to accrue, all participants may benefit from lower fees and additional services.
That is about it on the Pro side, but it could be a significant benefit. However, it simply requires that a sponsor do some net calculations on what the added costs of carrying the legacy account are. Naturally, if the fees associated with carrying the legacy accounts exceed the benefit through economies of scale discounts, it ceases to be a benefit overall.
The “Cons” of retaining legacy funds “In” the DC plan
There are several potential downsides associated with retaining legacy accounts within the DC plan that sponsors should be aware of. First, what are the costs associated with carrying a legacy account? Participants with smaller balances are likely to be a drag on a plan because of the fees associated with record keeping. However, larger plans, with more scalable, more sophisticated record keeping capacities may wish to encourage participants to retain their accounts within the plan. It all depends on the resources and size of the plan. There really is no one-size-fits-all answer to this one.
Aside from costs, there is the added exposure, resource commitment and liability from managing legacy accounts. Also, when considering the situation from the participant perspective (the only legal and ethical perspective) is it in their best interest to retain their account with your plan? Or do they have another employer plan they could roll-over into?
Outflows from corporate plans are exceeding inflows from corporate DC plans.
According to Cerulli research to be published next month, outflows exceeded inflows by $40 billion last year. Corporate DC assets totaled $4.9 trillion last year. The results were based on analysis of Form 5500 filings.
Maintaining plan “ballast” in the face of declining asset flows can be put in either the Pro or Con side of the argument. When taken in the context of the pending DOL rule regarding “best interest” it is clear that clients fare better when their funds remain in the legacy account. More and more the scales are being tipped towards retaining legacy accounts in the plan. Sponsors should be consulting with their advisors on strategies to make the best of this situation.
