Former Employees With a 401(k) Balance

How Former Employees’ 401(k) Balances Could Be Costing You

Think your 401(k) plan is running smoothly? If former employees still have money in it, you might be paying more than you need to—and risking a costly audit.
 
Let’s break down why it matters and how a 401(k) force-out can keep your plan lean and compliant.

The Hidden Cost of Inactive Accounts

Employees leave. But their 401(k) balances often stay behind. Some forget to roll it over. Other people like your plan’s investment options. Some just don’t know what to do.
 
That’s fine—until it starts costing you.
 
Once a plan has 120 or more participants, federal law (ERISA) requires independent audits annually, which could cost upward of $10,000.¹ To get under the audit threshold, you might consider reviewing and identifying participants that should not be in the plan any longer.

Why It Pays to Clean Up Your Plan

There are lots of benefits to evaluating and limiting the number of former employees remaining in a 401(k), including:

• Lower plan costs
• Fewer fiduciary responsibilities
• Avoid expensive audits
• Keep your plan efficient and compliant

So, now that you’ve identified potential former participants, let’s take a look at how you can move them out of your plan when that makes sense.

How to Manage Former Employees in Your 401(k)

As with most aspects of 401(k) management, the key here to determining who you should or should not remove is to develop and document a process you can use every time someone leaves your business.
 
Here’s a simple process to follow:

1. Communicate When They Leave

First, present an employee’s options for their 401(k) savings whenever they leave the company. Give them clear options:

• Roll over to an IRA or new 401(k) plan
• Take a cashout (not ideal)
• Leave it in the plan (if allowed)

Provide any paperwork they’d need to complete and explain the pros and cons.

2. Review Your Roster Annually

Once a year, check who’s still in the plan. Compile a list of those former employees who still have money in your business’ 401(k), and take one of two steps depending on how much money they have:

What If You Can’t Reach Them?

People move. They change emails. They ghost. If you can’t find a former employee, follow the Department of Labor’s steps:

• Send certified mail: You have some ability to ensure your communication is reaching the place it’s supposed to. If it’s returned, that’s pretty good evidence they have moved.
• Check all company records: Your 401(K) records might be out of date, but you could have good contact information elsewhere. Check any healthcare plans, other retirement plans, or HR records to see if there’s another way to contact them.
• Contact their beneficiary: Reach out to your former employee’s designated beneficiary (with a phone call or certified mail) to see if they can put you in touch.
• Use free online search tools: The word “free” here is important because of where you go from here. If the free tool doesn’t pan out, you’ll have some decisions to make when it comes to continuing your search—or not.

Still no luck? You can consider a paid search—but only if it’s reasonable based on the account balance.
 
If you still can’t find them, the next step is to document everything you did in trying to find this person. With that documentation in hand, you can move the assets out of your plan to a low-risk IRA to preserve the value until they (hopefully) resurface.

Why a Good Advisor Matters

Many recordkeepers charge per participant, so they have no incentive to help you reduce headcount. But a flat-fee advisor can help you:

• Spot inactive accounts
• Streamline your plan
• Avoid unnecessary costs
• Stay compliant

Making sure your employees have clear options for their savings in your plan isn’t just important for you as a business owner; it’s also of critical importance for your employees. In fact, cash outs that happen when an employee leaves a job are the number one drain on personal retirement savings.² Plus, helping former employees avoid cashing out their savings protects their future—and shows you care.

Let’s Clean Up Your Plan

Want to avoid extra costs and keep your 401(k) running smoothly? We can help. Talk to us about managing former employees in your plan.

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