Orphaned plans spell opportunity for advisors

Advisors to group retirement plans can use the growing stock of orphaned participants in 401(k) plans to prove their value to sponsors.

That's the advice from Robert Leahy, a retirement plans sales consultant at Chicago-based Alliance Benefit Group, who says advisors can help sponsors tackle this growing problem, educating them on the costs and risks of maintaining the retirement assets of former employees, and perhaps even mining new clients from the cache of migrating employees. 

A growing number of plans are allowing terminated employees to live on in group plans, either willfully, or often out of apathy.

Leahy says that at Alliance, 12 percent of plans with fewer than 100 participants, and 13 percent of plans that are larger allow workers to stay enrolled after they leave the company. About 20 percent of the new plans Alliance acquires have orphaned enrollees.

Sponsors focus their energy on maintaining and communicating with the accounts of existing employees, and may be under the impression that carrying the accounts of former employees bears no risk.

Leahy suggests this is questionable thinking. For starters, there is risk in shouldering the unnecessary cost of maintaining orphaned accounts. New regulations requiring disclosure communications to all enrollees adds to the expense of administering a 401(k) plan.

Those are direct costs. There also are expenses in the time and opportunity cost of tracking former employees, whose personal information (contact numbers, -addresses) may not be up-to-date.

Accounting costs to the IRS can also add up. Form 8955-SSA requires plan sponsors to update their list of terminated participants and file it with the Social Security Administration.

Failure to comply with the myriad disclosure requirements is a breach of fiduciary duty. Carrying terminated employees’ accounts only increases the risk of a fiduciary infraction.

Smaller plans that can be exempted from audits based on number of enrollees would be wise to shed terminated accounts, Leahy says, particularly if those accounts puts them above the threshold for exemption (typically 120 enrollees).

More and more, record-keepers and plan administrators charge sponsors a flat cost based on the number of enrollees, meaning sponsors don’t need to carry orphaned accounts for the purpose of lowering administrative costs for the plan, and its enrollees.

Leahy suggests advisors work with sponsors to incorporate direct rollover language into plan documents. Sponsors are allowed to automatically rollover accounts with under $5,000 in assets, but not without the explicit inclusion of that language in plan documents.

Advisors can add value to their service by helping sponsors tackle this mounting problem. Specifically, Leahy says advisors should coordinate with third-party administrators to compile a list of orphaned accounts, and then work directly with sponsors to craft and execute communications to former employees that outline the benefits of rolling assets over into IRAs.

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