401(k) plans that do the firing
by William G. Lako, Jr.
Columnist
May 23, 2013 11:49 PM | 1580 views | 0 0 comments | 26 26 recommendations | email to a friend | print
William G. Lako Jr.<br>Business Columnist
William G. Lako Jr.
Business Columnist
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The employer has a fiduciary responsibility when they sponsor a 401(k) plan to keep costs reasonable for the plan size and services rendered. Since plans are priced based on the number of participants and the amount of assets held, there has been an increase in employers kicking out former employees who left assets in the 401(k) plan.

Most company retirement plans are designed so that the participants bare the investment cost, while the employer bares the majority of the administrative cost. Anyone with assets in a company-sponsored plan must be treated as a participant in that plan, regardless of whether they still work for the company. Therefore, if a plan has a number of terminated employees with balances in the plan, it can be both expensive and an administrative burden for the human resources department to track former employees.

HR departments often find it difficult to deliver the required annual Department of Labor disclosures because they do not have accurate email and mailing addresses for terminated employees. While the HR department can easily send a companywide email to the current workforce, they must attempt to locate and contact former employees to distribute disclosures on an individual basis in most cases.

In addition to the administrative burden, terminated employees with balances in the plan can cause a plan to require an annual audit. Audits are not cheap, and the company must bare this cost. If a plan has more than 100 participants, it will most likely be required by law to have an annual audit. Because terminated employee participants count towards this number, it is often in the company’s financial interest to force terminated employees to rollover their account to avoid crossing the audit threshold.

Additionally, plan pricing can improve if terminated employees with low balances are forced from the plan. Most 401(k) vendors price plans based on the average account balances, taking the total plan assets dividend by the number of people participating in the plan. The higher the average account balance, often the better the plan’s pricing. It is administratively easier to manage 10 participants with $100,000 than 100 participants with $10,000. Forcing terminated employees with small balances from the plan can improve the plan’s pricing for current employees.

Thankfully the Department of Labor provides rules for dealing with former employees’ 401(k) plan assets. If a former employee has less than $1,000 in the plan, the plan can close the account and issue the participant a check. If an account has between $1,000 and $5,000, the plan can roll the participant’s assets to an IRA administered by a third-party custodian. The law does not allow the plan to force participant to withdraw from the plan if the participant has more than $5,000 in the plan.

Additionally, if the company’s 401(k) plan changes vendors, former employees’ assets could be defaulted to another investment option during a change. Surprisingly, this is legal. Plans should make a reasonable attempt to contact former employees, but the responsibility lies with the former employees to keep their contact information current, if they choose to leave their assets in the plan.


William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.
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