Few things are as irritating to employers as the uncashed checks of former employees who leave small balances in their workplace retirement savings accounts.
Beth Pattillo, director of retirement and financial programs at Leidos, estimates that the company has “several thousand dollars of uncashed checks” of former employees in the company’s $12 billion 401(k) plan, money that remains as a liability on the company’s books.
“We spend a lot of time and effort trying to find missing participants and try and reach out to get those accounts distributed as appropriate,” she said.
To help reduce the problem, the technology company decided to change its 401(k) automatic cash-out, or “force-out,” policy.
Beginning in July, the company will roll over all account balances of former employees with more than one penny, up to $7,000, into an individual retirement account.
“We will be working with a new IRA vendor, and they will be able to take balances from one cent to $7,000,” she said. “Hopefully this reduces the uncashed checks, and we’ll be able to have a clear message to participants to reach out to the vendor for anything under $7,000.”
The company currently cashes out balances under $1,000 and rolls over balance amounts between $1,000 and $5,000 to an IRA, a practice followed by the majority, or 82%, of employers, according to Vanguard Group’s latest How America Saves report.
Employers typically cash out balances under $1,000 and don’t roll it over to an IRA because IRA vendors until recently did not take balances under $1,000, Pattillo said.
Part of the issue was that many banks weren’t willing to open an IRA with, say $40, a market mentality that has shifted, she said.
“I think that there’s more appetite for institutions to take those small balances,” she said.
Upping the limit
Leidos is also increasing the limit on how much money can be rolled over to $7,000 from $5,000, an increase permitted under the SECURE 2.0 Act.
“We actively want to keep former participants in the plan, but we also want to streamline our plan to follow updated guidance just so it is easy for administration,” Pattillo said.
The reasoning echoes that of many other employers as they move to increase the force-out limit to $7,000, one of the most popular optional 401(k) design provisions in SECURE 2.0, according to a recent report from Alight Solutions.
Almost 2 in 5 employers (39%) have already increased the force-out limit to $7,000, with another 26% likely to add — or definitely adding — the feature this year or next year.
Rob Austin, vice president and head of thought leadership at Alight, said the measure helps employers reduce the cost of tracking former employees.
“Many employers are paying fees to record keepers based on participant count, so the more participants they have, the higher their fees would be,” Austin said.
In addition, employers fear that many of these former workers could become missing participants, a risk that’s reduced when there are fewer people to track.
“It’s tough to keep track of these people and eventually they might become a lost participant,” Austin said, explaining that employers have a fiduciary responsibility to locate missing participants or those who can no longer be contacted.
Employers, for example, must document efforts to find participants, including tracking communications and search methods used, he said.
David Stinnett, principal and head of strategic retirement consulting at Vanguard, agrees that a higher limit on force-outs reduces the risk of missing participants.
“The likelihood of having up-to-date and current address and demographic information on former employees probably gets harder and harder to do the longer the time is from when you separated from service,” Stinnett said. “You can get lost participants because you have an account in the plan, but you have an out-of-date address for someone.”
Auto portability
Employers can also get at the issue — at least partly — by joining an automatic-portability service known as the Portability Services Network. If an employee moves to an organization that is part of the network, his or her retirement account balance will automatically be transferred to his or her new employer’s retirement plan, even if the amount is less than $1,000 and the new employer allows small-balance roll-ins.
Employees moving to organizations that are not part of the network also get help. The Portability Services Network will attempt to find and match any old 401(k) accounts the employee may have with other PSN member plans. The network will check each month to see if the employee’s new employer has become part of the network or if the employee ultimately moves to another employer that is part of the network.
Since the PSN launched in December 2023, more than 15,000 employers have signed up for the service.
While the number represents a modest 6% of all employers, interest in the service is growing, according to Alight’s research.
More than half of employers (52%) reported they were either very or moderately interested in the clearinghouse service, Alight’s research showed.
Leidos’ Pattillo is not among those interested in joining the clearinghouse, at least not for now.
While she “loves the concept,” the PSN does not accommodate Roth balances, a deal breaker for Pattillo.
“The issue is that under the IRS regulations right now, if there's an account with Roth balances, Roth accounts can't be part of that portability network,” she said.
Pattillo explained that the employees across all ages and savings levels have both pretax and Roth monies in the company’s 401(k) plan.
“We are not interested in utilizing a service that cannot be available across all of our participants,” she said, explaining that not making the service available universally could be misinterpreted.
“I don't want to have to say, ‘I'll do it for you, but I won't do it for you because you have this kind of account.' It would have an unintended and incorrect message that would look like I'm saying, 'Don't do Roth,' Pattillo said.