Virtually every retirement plan faces a growing problem that costs time and money and could actually cause it to fall out of compliance with various regulations. The problem is caused by ex-employees who still belong to the plan but end up being classified as missing or non-responsive because they can't be located or never acknowledge communications about their retirement accounts. The problem manifests itself in the cost and effort required of the plan to:
Continue making regular attempts to reach all participants.
Provide ongoing accounting and reporting for each account.
Enable the distribution of all assets of a plan scheduled for termination.
The solution: automatic rollovers
Fortunately, there is a solution. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created the automatic rollover IRA and enables plans to cash out participants with balances of less than $1,000 and to rollover retirement funds from missing and nonresponsive participants with assets of $5,000 or less to an IRA custodian that will create and administer an IRA in each former employee's name. These rollovers must be covered under the Department of Labor's (DOL) safe harbor provisions such as:
The rollover must be offered by a state or federally regulated financial institution.
Rolledover funds must be placed in an investment designed to minimize risk, preserve principal and provide a reasonable rate of return.
Fees and expenses cannot exceed those charged by the IRA provider for other IRA accounts.
Plan sponsors must provide information about the Automatic IRA provider in a Summary Plan Description or a Summary of Material Modifications.
Once funds are transferred into a qualifying IRA, plan sponsors are not required to monitor the IRA provider and have no responsibility for the IRA provider's compliance. In most cases, the IRA custodians will attempt to reunite these individuals with their funds by continuing to search for them.
What about uncashed checks?
A related problem is uncashed distribution checks. Retirement plans collectively, but unwillingly, hold billions of dollars of checks that they've unsuccessfully distributed to former participants. The funds represented by these checks are plan assets and rightfully belong to the participants, so plan sponsors are responsible for returning them to the plan and administering the funds. Several scenarios contribute to this problem. The DOL permits plans to cash out accounts of former employees with less than $1,000 in the plan. The assets are converted to cash, the appropriate amount sent to the IRS and a check for the remainder mailed to the former employee's last known address.
Many checks are returned marked "address unknown" and many others are just never cashed. The same problem occurs for larger amounts when a participant requests a distribution and doesn't receive or cash the check.
Maintaining these funds in the plan can be problematic:
