2020 Plan Sponsor Goals: Optimize Your Automatic Rollover Provision
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 changed the rules surrounding retirement plan cash-outs. For the first time, active plans could automatically transfer balances belonging to non-responsive former participants between $1,000 and $5,000 in to a Safe Harbor IRA. This change provided needed relief for plan sponsors, while also keeping those participants’ assets in a tax-qualified account.
But just as the evolving needs of plan sponsors facilitated the widespread use of automatic rollovers in the early 2000s, changes over the last 15 years have created new pain points for plan sponsors. Uncashed checks have piled up for many administrators, and a generation of increasingly transient workers has created an environment where expanding the use of automatic rollovers to include accounts below $1,000 is becoming more common for plan sponsors.
Automatic enrollment, one component of the Pension Protection Act of 2006, has been a huge positive from a plan participation perspective, with participation rates nearly doubling in plans that implemented it. However, it came with unintended consequences. New employees were enrolled in plans without making an affirmative decision, and as a result, the number of accounts left behind has increased exponentially.
According to the Government Accountability Office, 25 million individuals left retirement accounts behind in their previous employer’s plan between 2005 and 2015. This has created complications for plan sponsors as they grappled with the increasing number of inactive accounts within their plans.
According to data from ten member firms of The SPARK Institute, which represents recordkeepers and other service providers to retirement plans, 4.5% of all checks these firms issued in 2017 went uncashed, totaling 185,518 checks. Almost 98% of checks that went uncashed were less than $1,000, with 78% less than $100.
These numbers start to make sense when you realize that only 58% of all plans transfer balances between $1,000 and $5,000 to an IRA, and 85% pay out balances less than $1,000 according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans.
We’ve seen our plan sponsor clients deal with these developments in creative ways:
Automatic Rollovers Under $1,000
In an effort to minimize issues associated with uncashed checks, some plan sponsors have begun to roll over accounts with balances of less than $1,000 into Safe Harbor IRAs. They have amended plan documents so all terminated employees’ accounts with balances of $5,000 or less can be automatically rolled over into IRAs. Other plan sponsors have amended their plans to establish a threshold amount under which rollovers of terminated employees’ accounts with balances of $5,000 or less are not processed (e.g. $200) in order to protect extremely low balance accounts from multiple distribution and transfer fees. Either of these approaches will dramatically reduce the number of uncashed distribution checks in plans. This approach may all but eliminate uncashed distribution checks from these accounts.
Search Before Sending Checks
Plans that do not have an appetite for amending their plan documents can undertake preemptive searches to ensure they are mailing checks to former employees’ most current addresses. This approach may limit a plan’s exposure to some, but not all, uncashed checks. At Millennium Trust, we encourage our clients to perform regular searches before sending rollover notices or uncashed checks.
The Department of Labor recently reiterated that they are sharpening their focus on missing participant issues. The Advisory Council on Employee Welfare and Pension Benefit Plans, known as the ERISA Advisory Council, recently held hearings to understand the nature and scope of the uncashed check issue and invited Millennium Trust to provide expert testimony. Clearly, this issue is not going away.
Some plan sponsors may not be interested in amending their plan document due to the costs associated and corresponding participant notification requirements. But is avoiding a one-time, off schedule plan cost worth the continued hassle of dealing with uncashed checks? Beyond that, is it worth potentially making it onto the DOL’s radar?
Learn more about how our Automatic Rollover solutions can help.
The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.