How Successful Plan Sponsors Trim the Excess Stuff
The older I get, the less I like having “stuff.” Okay, so I have this thing with awesome cars, my camping gear habit borders on compulsion, and maybe I still have a Hot Wheels collection from when I was a kid stashed away in the attic. Or maybe it’s in the master bedroom, come to think of it. But the fact is, the more “stuff” we have as a family, the more of a long-term burden it becomes to maintain, store, and keep track of everything, and of life in general. I have been on a recent mission to rationalize my possessions.
Retirement plans can also accumulate “stuff.” There is the inevitable pile of records that the plan sponsor must keep such as plan documents, annual reports, etc. And then there are the participants in the plan themselves who may start to accumulate after they terminate employment. That’s fine if they are making a conscious choice to stay in the plan; however, many are probably there out of inertia. The easiest thing for a participant to do when leaving employment, if not hurting for the money (or if you don’t even remember it’s there, which, well let’s not even go there…) is to do nothing. Soon you have a plan that starts to accumulate former members, and they can start to clutter up your plan if you don’t do anything about it.
What would my advice be to the typical plan sponsor?
If you can, cash out former participants.
The IRS let’s you force distributions to anyone who has $1,000 or less in vested balance in the plan. This threshold can be increased to $5,000 if your force anyone between $1,000 and $5,000 to an IRA that meets their requirements.
Many plan sponsors do not do this. Why? Maybe they are concerned what these people would think, or are worried about the hassle of collecting forms and possibly paying out a batch of distributions all at once. These are valid concerns.
However, there is a long-term burden to carrying these ex-employees on the plan’s books. The longer people hang around in your plan, the more likely that someday you as the plan sponsor will get into the middle or a death, divorce, or disability situation – all of which are a lot more difficult to administer than just a regular, good ol’ termination or retirement distribution. In addition, many providers charge administrative costs based on plan size (participants, or assets), and if the plan sponsor is footing the bill, this could mean higher expenses. You could even be so unlucky as to have your former participant count push over the magic 120 threshold for requiring a CPA audit, further increasing your costs.
So what should you do? Talk to your provider. Chances are, they have done this before, and can help guide you through the process, including any plan language changes that may be required. You could end up being very glad that you did.
And for your participants who have a balance of $5,000 in the plan, you cannot force them out until they need to start receiving required minimum distributions at age 70 1/2. But you can send them a mailing with a benefit form every so often to see if that prompts anyone to take a distribution. If you make it easy for them, sometimes that’s all it takes.
In addition, you will want to…
Keep track of ex-employees who leave their money in the plan.
Something else to keep in mind is, the longer someone stays in your plan post-termination, the more likely it is you will lose track of them. The DOL requires that you track down “lost” participants to ensure they are paid their benefits. If you terminate your plan someday, you could be going back decades to the last known address, and end up having to find people. Unfortunately, you can’t just declare a retirement benefit to be “unclaimed property” and be done with it. At least not easily.
The good news is the DOL has some steps you can follow to do your due diligence, and your provider should know how to work within that framework. Of course it’s easier to find them if you act right away when you get that first notice from the US Postal Service that the mail is undeliverable.
Keep track of those former employees, and cash them out if you can. Don’t let your plan get any more cluttered than it needs to be. And if you do need to invest in taking some action now, look on the bright side – it will make getting rid of that collection of commemorative plates seem a lot more do-able!
Stay tuned for a post that will discuss questions to ask when considering a record keeper conversion!