Increasing access to and participation in retirement plans was a focus of The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law on December 20, 2019. The SECURE Act enables plan sponsors to enroll part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service as of January 1, 2024. This provision, along with increasing adoption of auto enrollment provisions, was intended to lead to an increase in overall plan participation. Although this was the goal, it does not come without additional considerations for plan sponsors.
The number of retirement accounts has indeed risen due to auto enrollment as well as job movement – the average worker holds 9.9 jobs throughout their career. Yet according to the EBRI/Investment Company Institute database, 41.3 percent of plan participants had less than $10,000 in their 401(k) savings accounts as of year-end 2015. Plus, research shows it takes a participant between five and six weeks, on average, to roll a 401(k) balance from a former employer’s plan to their current employer’s plan.
Plan sponsors are currently permitted to automatically cash out 401(k) participant balances less than $1,000 based on the plan’s provisions. However, a plan sponsor’s primary responsibility is to act in the best interest of plan participants, and a policy of automatic cash outs can have two potentially negative impacts on participants. Plan sponsors face possible exposure when cashing out participant balances if the participant never receives their funds due to an outdated address in the recordkeeping system. Plus, if balances are cashed out, the participant can be charged penalties and fees and miss out on future earnings.
A proposed SECURE Act 2.0 will attempt to prevent these automatic cash outs by requiring them be sent to a “Lost & Found” operated by the Pension Benefit Guaranty Corp. (PBGC), which would manage and store the accounts. While the Act would provide an alternative for plan sponsors to transfer these funds, in most cases the balances will remain in the Lost & Found account without resolution. Plans that have a large number of small balance accounts are encouraged to investigate auto portability options to automate the transfer of participant balances from a former retirement plan to their current plan.
Since plan sponsors are required to act in the best interest of plan participants, whether former or current employees, automatic cash out provisions should be reviewed to determine whether there is a more effective way to allow participants to stay invested in the market to take advantage of long-term market appreciation.
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