Making it easier for employees to bring their retirement savings along when they shift jobs obviously benefits them. Because it reduces the fiduciary risks associated with missing participants and auto cash-outs, facilitating portability also turns out to be a best practice for plan sponsors. Experts share why enabling auto portability matters so much.
Savings Left Behind
Though plan sponsors are allowed, under the 2001 Economic Growth and Tax Relief Reconciliation Act, to cash out accounts of former employees when balances are under $1,000, doing so exposes them to increased risks. Employee Benefit News puts it this way: “Automatic cash-outs of accounts with less than $1,000 present a big problem for sponsors and participants alike. Every year, approximately 1.6 million Americans who change jobs leave behind 401(k) savings accounts with under $1,000 in their former-employer plans…” A multi-year data analysis reveals that at least 10.5% of the checks for these sub-$1,000 balances go uncashed—creating an enormous liablity for plan sponsors. Risk ratchets up even further, considering plan sponsor obligations to curtail the instance of missing participants—an underlying problem associated with uncashed distributions. As retirement plan expert Steff Chalk shares on 401k TV, the data on uncashed checks is based on participants who voluntarily cashed out their accounts—so the problem is likely even more wide spread:
For those under-$1,000 balanced cashed out involuntarily — meaning without participants requesting it — the percentage of uncashed checks is likely much higher. Part of this has to do with missing addresses for participants. At least 1.3 million 401(k) accounts have lost or missing participants, according to 2018 research… In addition…nearly 33% of participants learned of a savings account in a former employer’s retirement plan they didn’t even know they had.
Reducing The Need for Automatic Cash-Outs
Auto portability is a win for everyone because it curtails the potential for “missing participants” and substantially reduces the need for automatic cash-outs—lowering risks for plan sponsors, while ensuring employees retain their savings. Employee Benefit News provides this summation of auto portability:
Auto portability is the routine, standardized and automated movement of an inactive participant’s retirement savings account, with less than $5,000, from a previous employer’s retirement plan to an active account in their current employer’s plan. The solution’s “locate” feature automatically pinpoints a participant’s current, active account, working in tandem with its “match” algorithm to begin the consolidation process. The address found by the “locate” feature is likely to be correct, with the…Boston Research Technologies study having noted that an active participant address record has a 92% probability of being accurate.
Portability and Protection
It is easy to see how supporting outgoing employees to transition their retirement accounts, a practice sometimes referred to as “assisted rollout,” is good for both people and businesses. Of course even the most diligent plan sponsor, following all regulations and best practices, can never fully eliminate the fiduciary risks associated with the role, making protection essential. Unfortunately, with ERISA lawsuits on the rise, the U.S. Chamber of Commerce points out that there’s been an increase in the cost of fiduciary liability insurance—making it harder then ever for plan sponsors and other fiduciaries to mitigate their risks.
The good news is that Colonial Surety is here to help. As a longstanding and trusted national provider of ERISA fidelity bonds, we’re committed to ensuring that plan sponsors from small and mid-size businesses can afford protection. Colonial’s annual premium for fiduciary liability insurance costs less than just one hour with an ERISA lawyer if disaster strikes, and arms you with defense costs and penalty limits up to $1,000,000 in the event of a covered lawsuit. For added value, we even include 50,000 of basic cyber liability insurance, lock in multi-year rates and offer installation payments. Obtain protection, in minutes, now:
Retirement plan sponsors are obligated by the Department of Labor to ensure participants receive their benefits on schedule. Failure to make every effort to do so has stiff consequences. If you have not yet gotten up to speed on the Department of Labor’s 2021 guidance on missing participants, be sure to do so now. The Employee Benefits Security Administration’s guidance is in three parts, available here: Best Practices; Compliance Assistance; and, Field Assistance Bulletin. Specifically, EBSA instructs retirement plan fiduciaries to:
- Maintain complete and accurate census information.
- Communicate with participants and beneficiaries about their benefit eligibility.
- Implement effective policies and procedures to locate missing participants and beneficiaries.
Don’t forget: Colonial Surety’s three point coverage package offers plan sponsors across the country protection, efficiency and value. Conveniently, Colonial provides: the required ERISA bond to protect the assets of the retirement plan from theft; Fiduciary Liability coverage to protect you and your assets from personal liability; and, Cyber Liability coverage to safeguard your company and plan from covered losses and expenses in the event of a cyber breach.
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Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. With a Trustscore of 4.8, we help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.