An important aspect of the oversight of 401(k) plans is managing "lost participants". These are former employees that left behind 401k account balances and can no longer be located. It is estimated that $1.35 trillion in assets had been left behind by job changers as of May 2021 with an average balance of $55,400 in each of these forgotten 401(k) accounts. At the bottom of this email I've provided links to articles to learn more about what industry experts are saying about this problem.
For those of us with a long career who have worked very hard for every penny we earned, this sounds odd to lose track of an account - but it is a real thing.
Another related issue that plagues 401(k) plans are leftover accounts cluttering up the plan adding extra expenses to the plan overall which may be borne by fees in the participants accounts and/or the company paying fees from outside the plan. Often the business owners and executives have the largest account balances and therefore shoulder the majority of the fee burden for these left behind accounts.
Our suggestion is, as a part of your "off-boarding" process of terminated employees, include in your process, actions such as those listed below. You may want to work this out with your HR leader, HR consultant or HR attorney:
Determine if the terminated employee has a 401(k) balance, and the current value.
If the balance is less than $5,000 (this will go up in the next year or two to $7,500) let them know they may be contacted to have their account proceeds sent to to them and encourage them to roll it over, not spend it. This is called a force out.
Let them know it is their responsibility to have a log-in for their account and keep their contact information updated, and encourage them to consider rolling over their account into an IRA or to their new employer's 401(k) plan.
Collect contact information from them. Make sure you have mobile numbers and email addresses that are likely to not be changed. Save this information where you can find it years from now. Make sure the record-keeper has it.
Have them sign a statement that they will be responsible for managing their 401k account, and making sure the record-keeper has up-to-date contact information. This is not for legal reasons but to just be sure it gets done. Yes it could come in handy if a terminated employee appears years later asking for their account. We have seen this happen.
Note that you cannot force them out if the balance is over the limit ($5000 now, soon $7500). But they can still be encouraged.
Note that if your plan has a 3(16) Administrative Fiduciary, managing "401k account clutter" is part of their job - however they can't be there "in the room" as terminated employees are leaving.
Please contact us if you have any questions or concerns.
Articles:
5 Tips for Documenting Missing Participant Searches