Former employee account balances can prompt a wave of challenges you’re now responsible for managing. How do these balances affect the overall plan’s health? What are the legislative guidelines governing these accounts? Moreover, what strategies can you use to mitigate any associated risks? Addressing these concerns is both an administrative task and a fiduciary responsibility. One plan sponsors must navigate wisely.
At California Pensions, we understand the intricacies of dealing with former employee account balances. Let us be your compass guiding you to managing this challenge.
The Risk of Former Employee Accounts Going Unchecked
When an employee leaves your organization, their retirement account doesn’t just vanish. It remains within the plan and continues to incur administrative costs, while potentially affecting the plan’s testing and compliance status. Moreover, plan sponsors shoulder the fiduciary responsibility of managing these accounts, as mandated by ERISA and IRS guidelines. Fail to follow these guidelines, and you can expect substantial penalties.
To illustrate, let’s take an example:
Suppose through the course of a Department of Labor (DOL) investigation, it was determined that a breach of fiduciary duty led to a plan’s loss of $500,000.
The fiduciary responsible agrees to restore the full amount to the plan pursuant to a settlement agreement with the Secretary of Labor.
In accordance with ERISA Section 502(l), the penalty for this breach is equal to 20% of the “applicable recovery amount.” Therefore, in this scenario, the applicable recovery amount is the $500,000 that was lost due to the breach and is being restored to the plan.
Calculation of Penalty:
Applicable Recovery Amount: $500,000
Penalty Rate: 20%
Penalty Amount: $500,000 * 20% = $100,000
In addition to restoring the $500,000 loss to the plan, the fiduciary would be required to pay a civil penalty of $100,000.
Total Loss After Breach of Fiduciary Responsibility
Options for Managing Former Employee Account Balances
So how do you avoid the pitfalls of former employee account balances? As plan sponsors, you have several options at your disposal:
Streamlining with Account Consolidation
One of the most effective strategies is encouraging the consolidation of multiple retirement accounts. This simplifies the management of these assets for both the plan sponsor and the former employee and can also lead to better investment oversight.
Lump-Sum Distributions
Offering a one-time payment option might be suitable for small balances, allowing former employees to consolidate their retirement savings. This approach can reduce plan costs and simplify plan administration.
Retaining Accounts within the Plan
There are instances where keeping the accounts may be beneficial due to plan-specific rules or if it makes economic sense for the individuals and the employer. Maintaining accounts within the plan requires careful consideration of the pros and cons, including potential administrative costs versus the benefits of aggregated assets leading to potentially lower management fees.
The California Pensions Advantage
With a legacy of providing tailored retirement plan services to our clients, California Pensions delivers solutions for every unique situation, including the handling of former employee account balances. We prioritize freedom of asset choice and have cultivated an organizational culture that thrives on long-term relationships with our teams, clients, and their advisors.
Our services include:
- Plan Design and Administration: Crafting a retirement plan that meets your organization’s goals and is compliant with all regulations.
- Compliance Monitoring: Ensuring that your plan stays on the right side of ERISA and IRS guidelines, even as they evolve.
- Consultation on Account Options: Advising on the best course of action for managing former employee accounts and facilitating a seamless transition process.
Reach out for a complimentary consultation with us, and together we can ensure your retirement plan is compliant, and well-managed.
