Importance of search services in the American retirement system

When an employee leaves their job, it’s not uncommon for them to leave their retirement account behind. This creates two distinct problems.

1) Over time, these retirement plan participants’ contact information may become outdated. When this happens, plan sponsors categorize them as “non-responsive” or “missing.”

2) The former employees may not realize how much money they have in their employer-sponsored retirement account or how it’s invested.

How can former employers/plan sponsors find these missing participants? How can we get more former employees to engage with their retirement funds again? We provide some practical solutions in this blog.

Retirement facts: Why people need to connect with their retirement accounts

It’s important for people to stay engaged with their retirement accounts and to choose what to do with those funds. Many Americans have fears around retirement savings – especially around the uncertainty of whether they’ll have enough in their golden years. Here are some of retirement statistics from the Transamerica Institute:

• 42% of people are worried they will outlive their savings in retirement.
• 57% of employees list saving for retirement as a financial priority.
• 50% believe their primary source of retirement income will be self-funded savings like 401(k)s, 403(b)s and IRAs. Only 23% believe they will rely on Social Security.
• 70% of employers feel responsible for helping their employees achieve a financially secure retirement.

There are a few ways to address these concerns. Individuals should be engaged with all their retirement accounts and understand their investment options. They also should continue to save for retirement with the accounts they have. Employers can help solve these problems with two solutions: search services and automatic rollover IRAs.

Search services for missing retirement plan participants

There are a few ways plan sponsors can connect former employees with their retirement funds. One solution is a search service.

As the name suggests, search services will look for missing account holders on behalf of plan sponsors. The organization doing the search can often find people with just a name and Social Security number.

Individuals are considered missing when an address isn’t associated with the retirement account or mail is returned from the address on file.

If that happens, the organization searching for the missing participant will use a variety of databases to find the account holder. The search can be done in a few days.

Information is shared with the plan sponsor so they can continue to communicate to their former employees about their retirement accounts.

When people are reconnected to their retirement accounts, they are empowered to choose how to use those accounts. They can roll funds over into an IRA or their current employer-sponsored plan, or keep their money where it is. They can better plan for their future and adjust their savings based on their goals.

Automatic rollover IRAs

Another solution to missing participants is the automatic or auto rollover IRA.

Employers may have language in their retirement plan that lets them move former employees with small balances from their retirement plan to a qualified custodian. (The “small balance” threshold will increase from $5,000 or less to $7,000 on Jan. 1, 2024.)

When an employer rolls over a former employee’s retirement balance to a safe harbor individual retirement account (IRA), the account is called an automatic rollover IRA.

Plan sponsors like automatic rollover IRAs because they can help minimize the administrative burden and potential liability of small balance retirement accounts. The plan sponsors can then focus more on their current employees’ needs.

The retirement accounts that are rolled over are not abandoned by the plan sponsor. They are transferred to an auto rollover provider who then reaches out to former employees to let them know about their options.

If an account holder is missing, the auto rollover provider will search for that person.

An IRA is the perfect account for former employees with small balances.

It gives account holders many investment options. They can invest in stocks, bonds, mutual funds and index funds of their choice. They are no longer limited by the investment options in the employer-sponsored plan.

Account holders also have the freedom to move their funds to another retirement account or to keep them with the automatic rollover provider.

Most importantly, funds stay in the retirement system when they are rolled over to an IRA. People can build a better future for themselves and their loved ones within their retirement account.

The future of American retirement

It’s possible to reunite former employees with their retirement funds, but there’s always room for improvement.

Improving search

Although the majority of inaccurate contact information can be updated with a search service, search resources can be improved. Every year, thousands of people change their names or addresses. To help people reunite with their retirement funds, Section 303 of SECURE 2.0 directs the Department of Labor (DOL) to establish and implement a wide scale online database for Americans to search for lost retirement plan funds.

The national online searchable database will let individuals search for the contact information of their plan administrator. From there, they can reach out and claim their retirement funds. The database has not been created yet by the Department of Labor.

Preventing missing retirement account holders

Employers can do a few simple things to avoid missing retirement plan participants. They can require their current employees to frequently update their contact information. Also, when someone leaves the company, an employer can ask them to update their information and communicate how to get in touch in the future.

These small steps will not prevent all future issues but can help.

If you’re a plan sponsor looking to use an automatic rollover IRA or search services, Millennium Trust may have a solution for you!

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.