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13 responses to “Ex-Employees Who Don’t Rollover – Will 401k Fees Increase Plan Sponsor Liability?”

  1. Nevinesq

    I have long been pitched that plan sponsors should WANT to keep those ex-employee balances in the plan, particularly the retirees – it is ostensibly a benefit that reduces costs for the plan, while at the same offering those participants the benefits (cost and otherwise) of remaining in the plan, with investments that they know. That said, I have found that most plan sponsors aren’t really aggressively interested in retaining those balances, because they do add a level of administrative/communications complexity (consider that in my reading of the Enron case, the real communication problem was with ex-participants/retirees who were no longer part of the company intranet/email).

    But this notion – that participants routinely get access to less expensive and “better” options outside the plan than they do in the plan – seems to me to be most pervasive among those who would very much like to separate those participants from their savings.

    I’m not saying that you CAN’T get less expensive options outside a qualified plan, but I’m willing to bet that most who try to figure out what to do after taking their money out of the plan don’t. In my experience, most are sheep heading for the proverbial (financial) slaughter.

  2. Randall L. Reese

    This is obviously slanted in favor of recommending a rollover to an IRA.

    Regarding fees, employer plans may have better leverage on asset based fees because of asset size. To make the blanket statement that it is more expensive to leave the account with the old employer is not true. Additionally, in some cases, the expenses listed are paid by the company and not the plan. Plan participants, terminated or not terminated, would not bear any of those costs.

    Regarding fund performance, it is also not entirely accurate to state that top mutual fund holdings in 401k plans are high-cost low-performing mutual funds. Small balance rollovers, or any size rollover, to an IRA may be invested in products that generate a high commission…after all, someone needs to get paid.

    Good article but a biased view that may not always be in the best interest of the participant.

  3. William Ulivieri- AIFA

    The S&P 500 Exchange Traded Fund (symbol: SPY) has an annual expense fee of .1% and currently yields 1.88%. There is no possible way that a plan sponsor could ever get the annual cost of their plan as low as 0.1%.

    Couple that with $7.95 per trade at a discount brokerage house, I can “outsource” my $100,000 401k to myself in a self-directed rollover IRA for a $107.95 expense the first year and still earn a yield of 1.77%; versus owning a similar mutual fund and yield almost zero.

  4. Michael A. Iley

    Chris – thanks for bring this topic up. I’ll agree that if we look at an industry average as a whole, fund performance may be less than desirable. However, there are well designed plans (thanks to a handful of quality consulting firms) with good quality, low cost plans.

    I hear the fiduciary risk argument, but what really is the risk involved in terminated employees maintaining a balance? In the interest of providing education vs. advise, participants are informed of their options at termination.

    The decision seems to be based more on opinion that fact. I’d welcome information on cases where there was a clear consultant or plan sponsor fiduciary breach based on maintaining termed balances.

    William – VIFSX

    All the best,
    Mike

  5. DON

    Question regarding ‘ fees” – I am retired- and for certain reasons elected to keep some of my 401k type money ( pre tax) in a company plan. I am over 70 1/2 and must take RMD which is automatic. I recently- by chance- found out that a new separate ” fee” of 50 cents/month was being taken out. Turns out my previous union had agreed to such a charge for online software giving retirement advice to its members. The company – A Dow 30 with about 100,00 employees and about 50,000 union members had decided to charge all of its NON union employees this fee and also to those unions who agreed. But only those unions who agreed would be charged. fees taken from their account, NO option to cancel. In only one case- MY previous union – were ALL who had been previously represented ( member or not) charged this fee. This fee is NOT used for admin or accounting being paid for by the company and probably included in unit or share prices.- but only for access to the software. The software does not work for someone retired.

    It is not deductible per an phone query with IRS- who was quite puzzled by the whole arrangement. Unions cannot bargain for retirees, and I had no vote, no notice, nor was /is it part of the most recent contract.
    MY question is – is the fee taxable such that it shows up on my 1099R . ????

  6. DON

    PS Forgot to mention that I am NOT and cannot be a retiree or retired member, I pay no dues, and cannot pay dues.

  7. marshall cobb

    I agree with much of what has been said but I’m not sure there’s an answer. The question implies a verdict as to whether or not an account/investment in a 401(k) is better or worse than a similar investment in an IRA. The answer is that it depends — and that answer changes with nearly instance you examine it as the investments and related fees differ. There isn’t a single guideline that dictates what is fair and reasonable under each setting. At some point a plan sponsor has to make the determination that they are offering a 401(k) plan for their employees that is both fair and reasonable. If a plan sponsor feels that their current offering is lacking they should probably lose a little sleep on a variety of fronts — but I don’t think they should lay awake at night pondering all of the ways that a particular ex-employee might be able to craft an IRA account that is potentially better/cheaper. As you state, that decision is up to the employee.

  8. Is a 401K Rollover a Good Idea When Changing Jobs?

    [...] Christopher Carosa, CTFA writes this in the Fiduciary News Blog: [...]

  9. BPP401k.com Newsletter July 6 - Benefit Plans Plus 401kBenefit Plans Plus 401k

    [...] Ex-Employees Who Don’t Rollover – Will 401k Fees Increase Plan Sponsor Liability? There’s often a debate as to what’s in the best interest of ex-employees: to keep their retirement assets in their former company’s 401k or to roll those assets over into an IRA? What’s often overlooked in this calculation is whether this individual decision can inadvertently increase the fiduciary liability of the 401k plan sponsor at the former firm. Source: Fiduciary News. [...]

  10. Luther

    Thanks for the article. It’s very helpful.

    As an HR associate, I have been giving the task of “encouraging” former employees to leave our 401k plan to lower the plan’s cost. If they don’t leave, I have been instrusted to kick the out of the plan.
    I am a little unsure how to go about this. The article mentions the possible liability of just handing over the funds to the former employee without giving proper guidance. My HR manager suggested that I do exactly that…determine who the former employees and and kick them out of the plan, if they don’t leave on their own.

    What information and guidance do I need to accompany this action with? Do I only need to point out the possible tax consequences associated with not depositing these funds into another 401k or IRA?
    Should other information be passed on to the former employee?

    Thanks!

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