Is it best for ex-employees to keep their money in the company retirement plan or to roll it out?
Yes.
I'm sorry, everyone; I had a science teacher in middle school who would typically answer "yes" whenever anyone asked him an either/or question, and it used to drive me crazy. I just couldn't resist. ☺ Besides, that answer is accurate.
In determining the best strategy for an ex-participant, looking at the individual circumstance is critical. For example, some ex-employees will realize a significant cost benefit by keeping their assets in the company-sponsored plan because the plan has a negotiated administrative fee based on the plan's total assets instead of the individuals' assets. Therefore, a sizable plan may have much lower administrative fees than a small, individual retirement account.
The benefit of rolling the funds to an individual retirement account (IRA) is that doing so offers a much broader set of investment options. Retirement plans traditionally have a limited number of investment options, while most IRAs offer thousands of funds and stocks. Additionally, by rolling the funds into an individual account, the employee no longer has any association with the company plan and therefore doesn't have to worry about changes to the plan that could affect his or her assets.
From an individual perspective, it's advisable for each former employee to discuss their personal options with an expert and determine which route best suits them.
The plan sponsor has the same "yes" answer (sorry again).
If participants keep their assets in the company retirement plan, these assets support the fee negotiation and add to the plan's overall value. Additionally, if the participants pay a portion of the plan fees, ex-employees' assets help to cover some of the costs and thereby reduce the administrative expenses applied to the active employees.
If the plan persuades ex-participants to roll their funds out of the plan, the plan sponsor's administrative responsibilities are decreased. However, ex-employees require plan sponsors to execute a higher level of diligence and communication to ensure that someone who is no longer employed still receives proper notice. These responsibilities include monitoring to make sure an ex-employee doesn't become lost and working to locate them if they do. These obligations can add costs and administrative burdens to the plan.
Plan sponsors and the plan operations committee should work together to decide the best overall process for keeping ex-employee assets or rolling them out. Once they make that decision, they should execute a consistent process accordingly. If the decision is to keep ex-employee assets, the plan sponsor should develop procedures for continual communication with these employees. If the decision is to persuade former employees to roll out their assets, the plan sponsor should have a procedure for reminding and supporting employees in the rollout process.
If you're interested in learning how Plan Notice can support either of these decisions, contact us. Plan Notice supports the rollout process for plans that choose to persuade ex-employees to roll out, and we handle all required due diligence related to communication and notifications with ex-employees.
