Departing Employees Often Neglect to Take One Thing: Retirement Cash
Retirement accounts that remain after a worker leaves are an annoyance to plan sponsors and a burden for company administrators.
Paul Bates says he would like to see employees take all their belongings when they leave their jobs at East Tennessee Children's Hospital in Knoxville, Tennessee.
That includes their retirement cash. Too often, employees don't do anything with the money left in their retirement accounts, and that causes administrative headaches for hospital compensation and benefits analysts like Bates. It seems every year there are a handful of employees whom Bates simply can't find.
"It wasn't a huge burden, but it did take a good bit of administrative effort," Bates says, noting the task pulls his team off their core jobs and adds up to 20 administrative hours to find missing ex-employees.
Retirement accounts that remain long after a worker has left as well as uncashed payout checks are more than a simple annoyance to many plan sponsors, says Terry Dunne, managing director for automatic rollovers at Millennium Trust Co. in Oak Brook, Illinois.
A look at 401(k) accounts managed by Charles Schwab & Co. showed that 43 percent of workers who left their jobs in the first quarter of 2008 had not moved their retirement money a year later.
"Companies are faced with the dilemma of having employees quit and not telling the company what it is they want done with their money," Dunne says. "It creates a cost and fiduciary burden on the company."
Many times the accounts left behind contain less than $5,000, experts agree. Smaller, multiple accounts can mean higher administrative fees. Second, finding former employees can be tricky, and getting them to do something about the accounts can be even harder. Plus, a plan sponsor's legal responsibilities may increase when ex-employees do nothing about these accounts, Dunne says.
And because high unemployment in the past few years means more employees have left companies, more money is being left behind. David Wray, president of the Chicago-based Plan Sponsor Council of America, says that $14.4 million was left in accounts in 2009, and could grow to $20 million by 2020.
"No company intended to have to manage a retirement benefit for departed employees," Dunne says. "It's a substantial problem for a lot of companies."
Mark Sweatman, president of Risk Compliance Performance Solutions in Dresher, Pennsylvania, says plan sponsors have options to mitigate risk and cost. It's important for companies to create a process for identifying and dealing with missing ex-employees.
"It certainly isn't hard to resolve, but if left untouched it can really become a problem," Sweatman says. "Once you document your process and execute it, it can work on autopilot."
Usually a plan's record-keeper tracks accounts and sends a report of the names of ex-workers and their account balances. By law, employers can do automatic rollovers for accounts with assets of $5,000 or less. This means that after a former employee is found and notified of the account status, their retirement funds can be automatically moved to an Individual Retirement Account. It can remain there out of the scope of the company's retirement plan until the ex-employee does something with the assets.
Accounts with more than $5,000 need to stay with the retirement plan and must be managed by the plan sponsor. Those participants get the same communication and information as those still working for the company.
Bates says he doesn't mind keeping track of those accounts because it is the employee's right; plus larger accounts can be cost-effective to the plan.
"We've got employees who have left our employment 15 years ago, and still have accounts with us," Bates says. "It's a benefit we provide. If people want to leave their money here, that's just part of being a good employer."
Checks that haven't been cashed can be a harder to solve, Sweatman says. While uncashed checks under $5,000 can follow the same route as unclaimed 401(k) plan accounts, uncashed checks remain an asset in the plan. As plan assets, sponsors are still responsible, or are fiduciaries to this money and need to follow all the federal rules in managing it, Sweatman says.
"There is very little guidance from the government in terms of uncashed checks," Sweatman says. "That is why it is so important [for plan sponsors] to document the process."
Plan sponsors "can't just say that their record-keeper does this," Sweatman says. "That's not the right answer because ultimately you are responsible for this."
Last year, East Tennessee Children's Hospital had 37 employees who stopped working for the hospital and did nothing to their retirement accounts. The hospital hired Millennium Trust to find the ex-employees. Millennium's Dunne says all the former employees were found; 13 took a lump sum or rolled assets into an IRA, and 24 still have IRAs with Millennium.
Overall, Bates says having Millennium take over the accounts is much easier than tasking his team to play detective and find missing ex-workers.
"Once the data is transferred, it is out of our minds and we can move on to the things we need to do," Bates says.
Patty Kujawa is a writer based in Milwaukee. Comment below or email firstname.lastname@example.org.