Employee turnover is commonplace in all organizations and when the time comes for an employee to leave a company for personal reasons or retirement, they often receive a card or a cake and then continue on their way. However, what some companies do not understand is that former employees and missing participants can have a large – and potentially negative – impact on their retirement plan and ultimately, their bottom line.
Recently, Mark Sweatman, President of RCP Retirement Services, authored an article for SHRM Online about how missing participants can cause real problems in an organization.Most plan sponsors are able to locate former employees or beneficiaries who have cashed out of the 401k or other company contribution plans. However, there are times when a participant goes missing. Sometimes plans automatically cash out small account balances, but often participants with higher balances choose to stay in the plan and when they do, administrators are at risk of losing track of them.
Many abandoned property laws include dormancy periods for unclaimed amounts in tax-deferred retirement plans. In most cases, the state of the last known address for the missing participant is the one that benefits when it comes to unclaimed property. Since unclaimed property laws are different for each state, some states may try to claim benefit payments or distributions under the general escheat provision in their unclaimed property laws.
If a person passes away, this problem gets worse. Since death is a distributable event in a defined contribution plan, the deceased person’s beneficiary should receive their distribution. However, if the plan sponsor is unaware of the fact that the former employee has passed away, it cannot begin the distribution and may be put in a difficult position when having to explain why account balances have declined between the time the beneficiaries are due a distribution and the time it is ultimately received.
All in all, there is no one way for plan sponsors and administrations to handle former employees and locate missing participants. One thing all organizations should be doing is analyzing data on an annual basis and making sure it is checked for errors and outdated information. It may be best to create an internal system for assessing data quality to help identify the number of plan participants that are missing in an organization.
Finally, when employees do chose to leave a company, an organization should provide them with information on how to roll over their benefits into an IRA or new employer’s plan. By taking these steps, companies can ensure that they stay in compliance as well as fulfill obligations to plan participants, essentially reducing the long-term risk those employees can have on an organization.
Read the entire article by Mark Sweatman
Go back to the RCP Solutions Blog
