Let it roll, let it roll (former employees’ account balances)

One of the rules I live by is that I believe that you should never let someone who dislikes you be in a position where they can hurt you. Let’s just say that have a former boss who should have taken that advice. That is why I’m surprised that retirement plan sponsors don’t make more of an effort to entice former employees to rollover their account balance into an individual retirement account.

Former employees can be a headache; I know I have been one. When a former employee leaves, it’s best to cut all ties. When it comes to a participant who is more likely to complain to the Department of Labor or sue a plan sponsor over their retirement plan, a current or former employee? I say a former employee, because of fewer repercussions.

While the distribution rules under retirement plans require a former employee’s consent for distributions of $1,000 or $5,000 (depending on the plan’s terms), it’s a good idea to tempt them to roll over their account balance and there are a number of reasons for that. Distributing required notices is tough enough to participants at work, it’s going to be more difficult to distribute notices to former employees that you may not have current addresses for. You’re also less likely to offer investment education to participants who no longer toil on employer soil. Participants who receive no investment education may cause you unnecessary liability for their investment losses because they will contend they didn’t receive the necessary information so that the employer could avoid liability under ERISA  §404(c).

Having former employees as a participant is a headache when you can’t find them or when they die and they have no valid beneficiary information. Working on the human resources needs for employees is enough, why do you need the hassle for employees who no longer work for you.

In addition, having too many former employees as participants may also require you to file an audit for your Form 5500 if you hit that magic 120 number thanks to those former employees. Nothing worse than to pay an auditor $12,000 to $20,000 for an audit you may not have needed if you tried to get former participants to take their money and run.

When your former employee has that exit interview, make sure they understand that they have an account balance under your retirement plan and it’s probably the best bet for them to take it with them and invest it any way they choose and tell them of the opportunity to roll over those assets into their new employer’s 401(k) plan.

As Elsa in Frozen might sing: “let it roll, let it roll.” Sorry, I’ve seen that movie 30 times in the past 3 months.

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