What to Do with “Orphan” 401(k) AccountsSeptember 20, 2018
Are your plan’s “orphan” accounts mounting? In other words, do you have a lot of funds left in your plan by former employees? Here’s what you should do.
Does your 401(k) plan resemble an orphanage? That is, do you have a lot of funds left in the plan by former employees? If your plan’s “orphan” accounts are mounting, it’s time to evaluate what it’s costing your company — and your active participants.
Pros and Cons
Orphan accounts with substantial account balances sometimes work in the employer’s and participants’ favor. That’s true, for example, if plan administration and recordkeeping fees are lower on a per-participant basis when total plan assets exceed certain thresholds. Orphan accounts might help your plan exceed the requisite asset threshold. Additionally, orphan accounts in the plan may benefit the active employees saving for retirement when fixed fees are charged to the plan and allocated over individual accounts.
However, it’s more typical to have orphan accounts with small vested balances. That’s because former participants tend not to be highly motivated to roll over small accounts — or they may even just forget about them. That situation can needlessly cost you and/or participants (including the owners of those orphan accounts). It depends on how fees are calculated. Over time, seemingly small fees can add up.
Managing Orphan Accounts
What can you do to take control of orphan accounts? If you don’t already have a policy on handling orphan accounts (an involuntary cash-out provision), establish one after you’ve analyzed the situation. The policy will provide a roadmap for you to follow, and it demonstrates that you take your fiduciary duties seriously.
If your analysis leads you to conclude that you should try to minimize orphan accounts, the steps you can take will vary according to the size of the orphan accounts.
ERISA allows you to distribute account balances up to $1,000 to former employees, whether they want the funds or not. And for accounts with balances between $1,001 and $5,000 in assets, you’re allowed to move the funds to an IRA that you set up on behalf of the former employee. These provisions must be included in your plan document. Also, in some cases, funds the participant rolled into the plan from another plan may not count against this threshold.
When funds in orphan accounts exceed $5,000, you can encourage former employees to roll those funds over to an IRA or their current employer’s 401(k) plan (assuming it can receive them). But, as noted, the larger the account balance, the greater the possibility that the net cost to you and active participants is minimal or even negative.
Evaluating Your Situation
Our employee benefit plan specialists can analyze 1) the funds that former employees have left behind in your 401(k) plan, and 2) plan documents to determine how plan administration and recordkeeping fees are calculated. Our analysis can help you decide whether to leave well enough alone (to maintain a higher total plan asset balance) or to encourage former employees to roll over funds (to minimize fees on accounts with nominal balances). Contact us to determine what’s right for your plan.