Small Balance Retirement Accounts May Have a Solution
Small balance retirement accounts left by terminated participants cause many plan sponsors to struggle. However, a solution may be available in the form of account consolidation.
BenefitsPro examined the factors contributing to the rise of small balance retirement accounts, the challenges these accounts create for plans, and what plan sponsors can do to encourage account consolidation. Factors like a mobile workforce (the average employee changes jobs 10 times during their working years), employee turnover, mergers, and acquisitions all contribute to the proliferation of small balance retirement accounts. Another perhaps surprising factor? Auto-enrollment. Sure, auto-enrollment encourages higher participation levels, but it can also unintentionally result in a larger number of small balance retirement accounts as participants move on for various reasons.
The BenefitsPro article also highlighted a list of “headaches” plan sponsors must deal with related to small balance retirement accounts, including reduced retirement readiness metrics; higher plan costs; added administrative duties associated with locating missing participants, handling returned mail, etc.; and heightened fiduciary risk due to missed mailings (i.e., statements, Summary Plan Descriptions (SPDs), etc. and risk of DOL and IRS audits related to missing participants.
The issues related to small balance retirement accounts present a variety of challenges. The solution, however, is simple — promote consolidation of the accounts. Offering participants more portability and flexibility effectively solves the small account problem for sponsors. BenefitsPro offers some recommendations for implementing strategic consolidation programs:
- An automatic rollover program (ARO) that handles distributions for separated participants with account balances of less than $5,000.
- A roll-in program for existing plan participants, regardless of balance, facilitated by an independent service provider. In other words, offer help for roll-ins so participants don’t have to do it themselves.
- A roll-out program for separated participants with balances greater than $5,000, which reduces stranded accounts, cash-outs, and missing participants, and also helps avoid unnecessary fiduciary risk.
The BenefitsPro article also recommends some “tactical” solutions to the small balance retirement accounts problem, including hiring an address location service to help track down missing participants. Anywhere from 3-6% of participants are missing, according to industry sources, which can result in returned mail, uncashed distributions and unpaid benefits — all of which significantly increases a plan sponsor’s fiduciary risk. Uncashed check services are another option plan sponsors may consider. These services create after-tax rollover IRAs where returned checks can be deposited, and they will also conduct periodic searches to try to find former participants and reunite them with their lost savings.
Small balance retirement accounts are a challenge, but not an insurmountable one. Using a combination of strategic and tactical approaches, sponsors can manage their fiduciary risks, as well as makes it easier for themselves and their participants to reap the benefits of small account consolidation.