Individuals responsible for the administration of a 401(k) retirement plan know that details, such as a participant’s date of hire or the number of hours worked, are important when determining an employee’s plan entry date. A lawsuit recently filed by the Department of Labor is a reminder that plan fiduciaries should also be paying attention to the details when an employee terminates employment. The plan at issue included a provision requiring that the account of a terminated employee be paid out if the account’s value was $5,000 or less. For a number of years, the plan fiduciaries did not instruct the plan administrator to make the required distributions. The plan’s third-party administrator charged a quarterly recordkeeping fee of $7 per participant account. The plan sponsor chose to allocate that fee based on each account’s pro rata value compared to the plan’s total value—meaning that participants with higher balances paid higher fees. The Department of Labor alleges that the plan fiduciaries breached their duty to the participants by causing the active participants to pay a larger fee than they would have paid if the plan had been administered in accordance with its terms and the smaller accounts were cashed out.
What should a plan administrator do? If your plan includes required cashout language for terminated participants’ accounts make sure that your recordkeeper is making such distributions at least annually. Some recordkeepers will make these distributions without specific direction by the plan sponsor; other recordkeepers will provide the plan sponsor with a list of the individuals whose accounts are proposed to be cashed out, and the plan sponsor must confirm that the list is correct and none of the individuals on the list have been rehired. Make sure you know the process that your recordkeeper uses. Even if your recordkeeper does not charge a per account fee, it is my experience that the number of participants and their average account balance size does have an impact on the recordkeeping fee. There are also other benefits to timely cashing out terminated participants’ accounts.
Timely cashouts may allow a plan to avoid an ERISA required audit. Large retirement plans, those with 100 or more participants at the beginning of a plan year, must annually obtain an audit by an independent CPA firm. The typical cost for the audit can range from $7,000 to $10,000 or more. There is a special rule that allows a plan with 120 or fewer participants at the beginning of a plan year to be treated as a small plan with no audit required, if the prior year’s Form 5500 annual report was filed as a small plan. Since terminated participants with account balances are included in determining the number of participants that are in a plan, fiduciaries of retirement plans with approximately 100 – 120 participants will want to be sure that any required cashouts are timely made so to avoid the added expense of an audit.
Timely cashouts reduce the possibility for lost participants. With today’s mobile workforce, following the plan’s required cashout language and making distribution to terminated participants as soon as possible after termination will ensure that the participant receives his or her account. In addition, such attention to detail minimizes the possibility that the plan fiduciary would have to spend time in the future tracking down participants for whom the plan no longer has a valid address.