How Rollovers to Your 401(K) Plan can Benefit Everyone

High workforce mobility means that many employees leave a collection of “orphan” 401(k) plan balances in their wake. As a plan fiduciary, helping new employees roll over their accounts from former employers can be beneficial for both parties.

Dealing with Orphan 401(k) Balances

One reason participants orphan their previous employers’ plans is that the process of rolling over an old 401(k) plan balance to a new employer’s plan can be cumbersome. Leaving a trail of orphan accounts may be the path of least resistance; however, many employees fail to properly manage their accounts even when they have only one plan to look after, let alone two or three former employer 401(k) accounts.

As for employers, small orphaned accounts add to plan administration costs, including the possibility of going over the threshold where an independent audit is required. To manage your 401(k) plan participant roster, you can roll accounts of terminated participants worth between $1,000 and $5,000 to an IRA in the participant’s name. You’ll need to perform due diligence in selecting an IRA provider, and you may be able to set up an automatic process.

If your plan doesn’t roll over former participants’ accounts to an outside IRA, what can be done? Consider advising former participants to consult with an independent investment advisor who can help them roll their balances into an IRA. Is this good for participants? Maybe. The overall fees that individuals pay on relatively small IRA accounts can be higher than those on accounts held in a 401(k) plan. Also, depending on the investments available to the participant on the rolled over funds, the former participant might be better off leaving funds in the investments available in the 401(k) plan.

Accepting Rollovers into a Plan

Even though a former employer might benefit from having smaller accounts rolled out of the plan after an employee’s departure, the new employer can benefit from having dollars rolled into its 401(k). This is especially true for larger accounts.

Generally, the larger a 401(k) plan’s total assets and participant’s headcount, the greater its ability to negotiate competitive fees for plan services. In addition, an Investment Company Institute study identified another asset size-fee relationship: the larger the average participant account size, the lower the fees. This pattern is independent of the plan’s overall size.

For example, the median “all-in” fee for small plans (with assets between $1 million and $10 million) was 1.29%, if the average account balance was $25,000. But the median all-in fee was 1.03% if average account sizes fell between $25,000 and $100,000. And they dropped to 0.96% for plans with average account sizes exceeding $100,000.

The study found the same pattern for plans with substantially more assets — plus, the all-in fees were much lower for all account size categories. For example, the median all-in fees for very large plans with aggregate assets exceeding $500 million were 0.43%, 0.39% and 0.29%, based on the same average account size groupings.

Doing the Right Thing for Your Employees

Reducing plan fees deducted from participant accounts even by a small percentage can have a significant impact on the value of the accounts at retirement. Encouraging your new employees to roll assets from their former employer’s 401(k) plan into yours may improve employees’ retirement preparedness. Lower administrative costs for the plan and increased savings for the participants can benefit both your company and its employees.

 If you have further questions regarding your 401(k) plan, please contact us at info@barneswendling.com. 

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