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401k Plan Sponsors’ Fiduciary Obligation to Former Employees

401k Plan Sponsors’ Fiduciary Obligation to Former Employees
October 22
00:03 2019

It’s a seller’s market for job seekers right now. With unemployment at historic lows thanks to a thriving economy, those looking for greener career pastures have a good chance of finding them.

The excitement generated when getting a better job, however, may overshadow some important decisions you have to make. For example, what happens with your retirement savings account at your former employer? With 401k plans mostly on some form of autopilot, employees may be less conscious of their own assets than they were, say, a dozen years ago.

For years now, the industry has been making much of “set-it-and-forget-it.” But does this philosophy have a downside? It may when employees leave for another company. They often, sometimes unknowingly, leave their 401k behind. “They ignore or forget that it exists,” says Robert Rubin, President of Your401ksource.com in Boca Raton, Florida. “Since they ignore it, they aren’t optimally allocating the investments.”

These old retirement savings accounts become orphaned at former employers. As the years go by since separation, ex-employees may not even remember they have these assets. “If employees leave their account with their former employer, they may just lose track of them,” says Craig Libis, CEO of Executive Recruiting Consultants in Dell Rapids, South Dakota. “Sort of ‘out of sight/out of mind’ type thing. If they don’t account for them, they may forget to include them for planning purposes and could impact the amount that they should be saving for retirement.”

This is a common problem. Luke Sotir, AXA Advisor, AXA Equitable Life, Wellesley Massachusetts, routinely find that “clients have one or more old employer retirement plans that are not being reviewed or monitored. It may very well be the case that leaving their funds in the plan is the right thing to do (lower fees, diverse investment choices) but it not usually a carefully made decision.”

Ditching your retirement assets at your old employer may sound bad, but many do something worse. “It’s interesting,” says Sotir. “Some employees will ‘cash out’ even after they are educated about the tax consequences. They feel that they will have plenty of time to build their retirement assets when in reality these existing assets are far more valuable than future ones.”

Plan Sponsors Have a Fiduciary Duty to Former Employees

While some argue that it’s an advantage to keep your money in a former employer’s 401k plan, as Sotir states, that may not be so. In fact, it may not be in either the former employee’s best interest nor in the former employer’s best interest for these assets to remain in the old plan. And if it’s not in the employer’s best interest, it’s likely to also not be in the current employee’s best interest, either.

There are clearly fiduciary ramification raised when former employees leave their money in their old company’s 401k plan. “At the very least, employers have a responsibility to educate their former employees regarding their choices and clearly explaining the impacts of each choice available,” says Urban Adams, Investment Advisor at Dynamic Wealth Advisors in Orange County, California.

Fulfilling the obligations of a plan sponsor can increase administrative costs when it comes to ex-employees. “Employers are still responsible for terminated employee balances,” says Libis. “They still need to provide the required notices and ultimately keep track of them if they have moved.” If the plan absorbs these costs, it means current employees are paying for benefits enjoyed by former employees.

It’s not just the usual reports, either. Most 401k plans now provide financial tools to participants. It’s easier for the plan sponsor to manage how these tools are used by existing employees. Former employees also have access to these tools, but it’s more difficult for plan sponsors to monitor how those tools are being used. “If the plan sponsor wants to allow/encourage former employees to keep their balances,” says Rubin, “then they should pro-actively communicate with them as much as they do with current employees.”

Not being able to easily monitor how former employees apply these tools, however, can increase the fiduciary liability of plan sponsors. “Employee Retirement Education is very important,” says Sotir. “Learning the basics and having them reinforced regularly will help prepare employees for their future retirement that will be here quicker than they imagine. Plan Sponsors must tread carefully that they do not cross the line into giving certain types of advice that can leave them open to liability for that advice, and the big concern here revolves around providing investment advice to individual participants.”

In many ways, permitting former employees to remain in the company’s 401k plan places the plan sponsor between a rock and hard place. It’s often a challenge to know what is the right thing to do. “This is a grey area,” says Sotir. “The Plan Sponsor typically has a duty to educate the employees about the plan and its options and benefits. Most plan sponsors hope to rely on some of the fiduciary ‘safe harbors’ or so-called 404(c) protections, but for plan sponsors to benefit from these safe harbors, participants need to receive sufficient information and education to make informed investment decisions. Advice about investment choices and specific actions for individual employees needs to be undertaken carefully as it can open the door to liability for the plan sponsor. May plans ‘hire’ outside firms to help with the education and advice so they can limit their exposure to giving certain types of advice (‘leaving it to the professionals’).”

 

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Gary Herman, President of Consolidated Credit in Fort Lauderdale, Florida, encourages “employers to use financial literacy programs like Balance, EverFi, or KOFE.” He says these third-party education platforms make it less likely for plan participants – both current and former employees – “do foolish things.”

The plan’s education policy defines what they need to do if they choose to allow former employees to keep their assets in the plan. “If someone has funds at the plan and you are the sponsor you have a fiduciary responsibility to offer top investment choice and the participant (employee or former employee) is communicated with and educated to choose from among the fund choices available to them,” says Rubin.

Indeed, many 401k plan are designed to help any retirement saver, whether they work at the company or not. “They can continue to educate their participants on the importance of keeping track of their balances,” says Libis. “They might use Target Date or Risk Based Funds so the participants are in an age appropriate type investment.

This doesn’t mean a plan sponsor needs to accommodate former employees. “If you want to treat a former employee different than a current employee,” says Rubin, “then you should encourage the former employee to rollover their funds.”

Plan sponsors can be more direct with smaller accounts. Libis says, “Plan sponsors can also force employees to roll out their balances if they are under a certain dollar amount.”

Adams regularly discusses rollover choices when leaving an employer. “I have seen examples of plan sponsor information regarding choices when separating from an employer,” he says. “No matter how well explained, it is important for employees changing jobs to have a trusted resource to review the choices and help guide them to the best option for that individual.”

And that trust begins with the plan sponsors fiduciary duty to serve all plan participants, both current and former employees.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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