What to Do with Terminated Employees' 401(k)s
Employees who are terminated may be gone, but they’re not always forgotten — at least regarding the retirement plan. A growing number of plans
allow terminated employees to live on as participants, notes Robert Leahy of Alliance Benefit Group.
How many plans do this? According to Leahy, 12 percent of plans with fewer than 100 participants, and 13 percent of plans with more than that. He includes the caveat, however, that those are figures for existing clients with whom his firm has worked to reduce the number of such participants. Leahy says that 20 percent of new clients have them.
Leahy says that participants and plan sponsors are to blame — the former out of inertia, the latter due to apathy. As for participants, he argues that terminated employees who keep their plan accounts are aware the funds are there, but find no convincing reason to move them into an IRA or their new employer’s plan. Leahy says that plan sponsors concentrate more on managing benefits for current employees.
There are risks to this, Leahy says. These include having to pay higher expenses for disclosures the law now requires, since they must also be made to terminated employee participants; the effort to keep track of how to contact those employees; having to prepare Forms 9855-SSA every year; and the effect of keeping those former employees on the rolls for purposes of the audit exemption.
Leahy recommends four steps that can address this problem:
- if the plan document has rules regarding plan force-outs, review them with the third-party administrator;
- ask for a list of all participants who are terminated employees, including their account balances;
- draft a notice to participants who are eligible to be forced out of the plan and inform them that their balances will be rolled over into an IRA or paid in cash; and
- compose a letter to terminated employee participants that discusses the advantages of a rollover into an IRA.
Finally, he advocates patience — he cautions that it may take years and multiple communications to reduce the number of terminated employees who remain as plan participants.
John Iekel is Senior Writer and Editor for the ASPPA Net and NTSA Net portals.