How Rollovers to Your Plan Can Be Beneficial to Everyone

High workforce mobility means that many employees leave a collection of “orphan” 401(k) plan balances in their wake. As a plan fiduciary, why should you care? Helping new employees roll over their accounts from former employers can be a benefit to both the employee and fiduciary.

Dealing with Orphans

One reason participants orphan their previous employers’ plans is that the process of rolling over an old 401(k) plan balance to a new employer’s plan can be burdensome and this may lead to a trail of orphan accounts being established.   Many employees fail to properly manage their accounts even when they have only one plan to manage, let alone two or three former employer 401(k) accounts, therefore, fiduciary’s should be diligent in their efforts to assist in the process of consolidation.

Small orphaned accounts add to plan administration costs, including the possibility of going over the threshold where an independent audit is required, thereby increasing the costs to the employer.  To manage your 401(k) plan participant roster, you can roll accounts of terminated participants valued between $1,000 and $5,000 to an IRA in the participant’s name. You’ll need to perform due diligence in selecting an IRA provider, and you may be able to set up an automatic process.

If your plan doesn’t automatically roll over former participants’ accounts to an outside IRA, then consider advising former participants to consult with an independent investment advisor who can help them roll their balances into an IRA.  The downside to the former participants would be that the overall fees that individuals pay on relatively small IRA accounts can be higher than those on accounts held in a 401(k) plan. Additionally, it may be more beneficial to former participants to leave funds in the investments available in the 401(k) plan since they offer greater diversity.

Accepting Rollovers Into a Plan

While a former employer might benefit from having smaller accounts rolled out of the plan after an employee’s departure, the new employer can benefit from having dollars rolled into its 401(k). This is especially true for larger accounts.

In general, the greater the 401(k) plan’s total assets and participant head count, the better its ability to negotiate competitive fees for plan services. A study done by the Investment Company Institute identified another asset size-fee relationship: the larger the average participant account size, the lower the fees. This pattern is independent of the plan’s overall size.

For example, the median “all-in” fee for small plans (with assets between $1 million and $10 million) was 1.29%, if the average account balance was $25,000. But the median all-in fee was 1.03% if average account sizes fell between $25,000 and $100,000. They dropped to 0.96% for plans with average account sizes exceeding $100,000.

The study also concluded that the same pattern existed for plans with substantially more assets, additionally, the all-in fees were much lower for all account size categories. For example, the median all-in fees for very large plans with aggregate assets exceeding $500 million were 0.43%, 0.39% and 0.29%, based on the same average account size groupings.

Do the Right Thing

Every little bit of savings adds up over time, reducing plan fees deducted from participant accounts can have a significant impact on the value of the accounts at retirement. Assist your new employees in preparing for retirement and encourage them to roll assets from their former employer’s 401(k) plan into yours. Lower administrative costs for the plan and increased savings for the participants are in the best interests of the company and its employees.

Sidebar: IRS Provides Safe Harbor Examples for Rollover Eligibility

What standard are plan administrators held to when determining if a rollover into a 401(k) plan on behalf of a new employee is proper? IRS Revenue Ruling 2014-9 provided two safe harbor scenarios.

In the first scenario, a distribution is initiated from the former plan’s trustee in the form of a check written out to the employee’s account in the new plan. It is imperative that the new plan’s administrator review the former plan’s Form 5500 to determine if the former plan was a qualified plan, and therefore, eligible for rollover.

In the second scenario, the fact pattern was the same except that the new employee’s IRA was the source of the rollover. The new plan’s administrator should have the employee confirm that she was below age 70½ — the age at which she would have to begin receiving minimum distributions.

The revenue ruling addressed whether the administrator of the employee’s new plan could reasonably rely on this evidence to determine that the checks were suitable for a rollover — even if they were misrepresentations. The IRS ruled that, without any evidence to the contrary, the answer is yes. But if the plan later determines that the rollover amount is an invalid rollover contribution, it must distribute the amount rolled over, plus any attributable earnings to the employee within a reasonable time.


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