Year-end planning for business owners takes on many forms. For those that sponsor 401k plans, it should include a review of the company plan and preparing amendments accordingly.
One persistent plan-sponsor challenge (that results in wasted productivity) involves former employees/participants now missing or unresponsive.
The nature of these participants presents a range of issues for sponsors, as they are required to deliver formal plan disclosures and, in some cases, additional IRS and DOL reporting.
Unresponsive former employees also drive up participant numbers while decreasing the average account balance, leading to less favorable recordkeeping plan pricing.
Advisors who specialize in the 401k market would be wise to use the year-end review as an opportunity to help plan sponsor clients address this challenge.
In the process, you can save them big money while ensuring that you retain their business and potentially attract new clients.
As you strive to both maintain your current plans and identify additional business opportunities heading into 2019, removing or simulating the removal of de-minimus participants can pave the way for new opportunities.
Forms 5500, Schedule C and Schedule H offer insight into how many company plan participants are former employees, how much the plan is paying in administrative fees and other fee arrangements. This gives you the opportunity to present strategies that improve the plan’s numbers.
Establish a plan
Advisors can partner with an IRA rollover provider to create a cleaner, more efficient plan for a recordkeeper to price, plus maintaining that partnership with the IRA rollover provider is portable between record keepers and can provide stability that you can trust. This can establish your value before meeting a potential client or add value to a current client.
The primary benefits of implementing automatic IRA rollovers include:
- Reducing administrative time and actual expenditures for plan sponsors,
- leveraging these reductions to decrease plan pricing and the cost to existing participants, and
- offering terminated employees the greater profitability of an IRA compared to money market accounts or uncashed checks. It also enables plan sponsors to focus on the participants who matter most and can drastically reduce red flags that lead to DOL audits.
Although the benefits are evident, many plan sponsors don’t take time to evaluate the services of an IRA rollover provider, which creates an opportunity for advisors who can do the work for them, particularly when it comes to smaller accounts.
As part of the mandatory 401k force-out process when an employee leaves a company, accounts from $1,000 to $5,000 must be transferred into another type of investment vehicle. For accounts under $1,000, it’s generally assumed that participants will be forced out in cash.
But adhering to that elementary thought process means missing a great opportunity to add value to your plan-sponsor client.
As an alternative, recommend changing the force-out language in the plan document to indicate all accounts under $5,000 will be transferred to an IRA, with the help of an independent rollover provider.
This will alleviate a major pain point for plan sponsors, as accounts under $1,000 often result in uncashed checks. Whether the terminated employees can’t be located or simply aren’t being responsive, they and their assets are still officially part of the plan until those checks get cashed.
Do the math
Only two factors typically figure into a recordkeeper’s cost analysis for a 401k plan: average account balance and number of participants. The higher average account balance helps generate revenue, while fewer participants reduce administrative costs.
So, increasing the former and decreasing the latter offers a great scenario to obtain a better price. Both objectives can be achieved by rolling over all accounts less than $5,000 into an IRA.
Furthermore, uncashed checks can lead to fines from the DOL since sponsors have a fiduciary duty to act in the best interest of all plan participants.
Such audits can result in fines that may cause the sponsor and recordkeeper to argue over who should pay, with you getting pulled into the middle. Implementing automatic IRA rollovers helps avert this type of contentious situation that can jeopardize client relationships.
The best way to attract and retain clients is by continuing to add value year-over-year.
Implementing strategies to address the missing participant issue, deal with uncashed checks and institute a totally free solution by forcing out all accounts under $5,000 into an IRA creates goodwill among current clients, strengthens your role as a trusted advisor and enhances the value that can be offered to potential clients.
From all these perspectives, such a partnership is clearly a winning proposition.
Mark Koeppen is senior vice president of strategic rollovers at FPS Trust Company in Centennial, Co.