Should They Stay or Should They Go?

By Kyli Soto and Troy Jensen

For some 1980’s nostalgia, think back to the staccato drum beats and strummed electric guitar chords of English rockers The Clash and allow your mind to drift into the lyrics. We apologize if the song is stuck in your head for the rest of your day. But there is a nice parallel in the lyrics when we’re thinking about whether terminated participants – those no longer employed by your organization but still in your retirement plan – should stay or go, particularly those with smaller account balances.

Before we dive into the song, some background feels appropriate. IRS rules allow for plan sponsors, when optionally written into their plan provisions, to remove terminated participants with small balances. Prior to 2023, “small” was any amount up to $5,000. Congress’ passage of the SECURE Act 2.0 now gives plan sponsors the option to further increase that threshold up to $7,000. Any participant with a vested balance of $7,000 or less can be forced to take their money out of the plan with required advance notice from the plan sponsor. If between $1,000 and $7,000, this is done as a rollover into an IRA opened in the participant’s name. For amounts under $1,000, the rules permit that a check be sent directly to the participant and the money is taxably distributed out of their retirement savings.

Why would plan sponsors do this? For one, if the employer is generously covering the recordkeeping costs on behalf of its participants, it is an extra expense for them to keep paying for someone who is no longer employed. Secondly, it can be more costly to all participants remaining in the plan, over time, to hold onto these small balances. Recordkeeping providers generally price their services based on average account balance, so any smaller balance participants can drag down that average, increasing fees for everyone.

The Clash, Verse One: “If you say that you are mine, I’ll be here ‘til the end of time.”

Consider another Englishman, Sir Issac Newton, admittedly less a rocker and more a scientist: his first Law of Motion taught that objects at rest tend to stay at rest unless compelled to change by the action of an external force. Inertia is just as real for plan participants. People tend to behave like those objects and can be resistant to change, or at least find change inconvenient. For participants in your retirement plan, expect that they will tend to stay in your plan “’til the end of time” unless you give them a polite nudge toward moving those assets out.

 “If I go there will be trouble…so come on and let me know.”

Participants don’t always make the best financial decisions when they do things alone. Without proper education and guidance, some may do some ‘emotional investing’ (selling low when it doesn’t feel good and buying high when things seem rosier) or take their funds out of their retirement plan to use for non-retirement purposes. Easy as it may seem to kick out former employees and leave them to fend for themselves, a sense of paternalism may instead spur plan fiduciaries to at least help oversee what little assets they have entrusted to them. Sound fiduciary processes should be in place for overseeing the investments you make available in your plan, and it arguably adds very little risk to maintain that oversight even for small balances.

“…and if I stay, there will be double.”

If you allow terminated participants to stay in your plan, there is a fiduciary responsibility on your part to make sure that these participants don’t go missing. Many move on, both physically and mentally, when they leave a job and often forget to provide an updated or forwarding address. Uncashed RMD checks, returned mail, no beneficiaries on file…all are signs that a participant may have forgotten or abandoned their retirement assets. Finding those participants is a necessary obligation for employers. For those plan sponsors who pay the recordkeeping fees on behalf of their participants, you’re now paying for someone that no longer works for you and may not even be aware that they have an account in your plan. If participant-paid, recordkeeping and other fees may quickly and significantly erode whatever balance remains.

“This indecision’s bugging me (esta indecisión me molesta).”

We know that participants tend to look to their employers to help them in making investment decisions for retirement savings. We also know that there is a cost to having these participants in the plan, and the soft costs to keep track of them. So, you gotta let me know, should I stay or should I go? Determine what is best for your participants, even the ones that no longer work for you. The 1980’s are counting on us to let them know.