Move ’Em Out

Because maintaining small account balances for former employees can result in administrative burdens, many 401(k) plans automatically cash out accounts valued at $5,000 or less — unless the departing employee elects a rollover to another plan or an IRA. New rules require that small balances be rolled over.

Under the new rules, plans must transfer automatic cash-outs of more than $1,000 directly to an IRA set up for the former employee — unless the person elects to receive the distribution or have it paid directly to an eligible retirement plan or another IRA. Accounts valued at $1,000 or less may also be rolled over for administrative convenience.

Selecting an IRA Provider

For employers that are concerned about the fiduciary liability involved in selecting an IRA provider for cashed-out accounts, the U.S. Department of Labor’s (DOL’s) final regulations provide a safe harbor. You can fulfill your fiduciary duties by meeting these requirements:

  • The rollover can’t exceed $5,000.
  • The rollover must be to an IRA
  • The employer must have a written agreement with the IRA provider that addresses appropriate account investments and fees.
  • Certain disclosures are required.
  • The plan fiduciary cannot engage in a prohibited transaction when selecting the IRA provider.

The IRA provider cannot charge higher fees than would be charged for a comparable rollover IRA. Examples of possible account expenses include set-up charges, maintenance fees, investment expenses, termination costs, surrender charges, and similar fees charged by other IRAs.

Investing the IRA

The investment chosen for the IRA should be designed to preserve principal and provide a reasonable rate of return, consistent with liquidity. Examples include money market mutual funds, stable value funds, and certificates of deposit.

In addition, the investment must be offered by a state or federally regulated financial institution. Regulated financial institutions are generally defined as a federally insured bank, savings association or credit union; an insurance company whose products are protected by a state guarantee association; or a registered investment company.

Disclosures

Before an account is cashed out, the participant must be notified in writing either separately or as part of a rollover notice that, absent an affirmative election to receive the distribution or roll it over, his or her distribution will be paid to an IRA. As long as the notice is sent to the participant’s last known mailing address, the notice requirement will be deemed satisfied, even if the mail is returned as undeliverable.

In addition, you must include a description of the plan’s automatic rollover provisions for mandatory cash-outs in the summary plan description (SPD) or a summary of material modifications (SMM). The description must include:

  • An explanation that the mandatory distribution will be invested in a product designed to preserve principal and to provide a reasonable rate of return and liquidity,
  • A statement indicating how fees and expenses will be allocated to the IRA, and
  • The name, address, and phone number of a plan contact (if not otherwise provided in the SPD or SMM) that can provide further information about the plan’s automatic rollover provisions, the IRA provider, and the fees and expenses charged.