Recent Posts:401(k) Auto Enrollment - Unforeseen Admin Costs Attributable to Small Account BalancesAn experience many plan sponsors encounter following the rollout of a 401(k) auto enrollment campaign is an increase in the number of non-participating individuals with relatively small account balances. These balances occur for a few specific reasons and can significantly impact the costs of plan administration. With sufficient planning, auto enroll can be implemented without drastically altering costs – but what can be done when it’s too late and the growth of small account balances begin costing you money? As auditors, we frequently see auto enrollment lead to the accumulation of small balance accounts. The two most common themes driving this trend being: (a) not requiring a sufficient waiting period (or service requirement) and (b) inadequate education of auto enrollment during the hiring process. Service requirements are an important consideration as, when enrolled too quickly, the design of the plan may be such that it is destined to capture many individuals you will look back on as short-term employees. This is especially true if you operate in an industry that has a high degree of initial turnover. It is common that we see the scenario unfold with employee’s entering the plan, terminating, and ultimately leaving a few dollars behind in the 401(k) plan. Education is also key in the prevention of small balances. From our experience, many plan sponsors consider the “new hire orientation” as a sufficient platform to inform individuals that they will be entering the 401(k) plan. During this orientation, the new hire is bombarded with tax forms, handbooks and checklists. Informing the employee that the company sponsors a 401(k) plan is not an educational campaign and many new hires will not process that they will be having money withheld from their paycheck in the coming weeks. When the 401(k) deductions start occurring, some employees will take action and “opt out” of further contributions – effectively creating yet another small balance account. As the number of accounts with small balances begin to grow, so do administrative costs. Many sponsors’ employ layers of service professionals to help ease the burdens of administering the plan. These providers, be it third-party-administrators, record-keepers, asset custodians, wealth advisors, etc., all get paid and commonly have charges based on headcount. With customary charges in the range of $75 per participant, the small balances begin to take their hidden toll. In addition to service providers, the Department of Labor and IRS also look at overall headcount. When small balances push the plan’s headcount above 100 individuals, the plan is considered to be a “large” plan and is subject to additional administrative requirements. Large plans are required to engage an independent CPA firm to audit the plan’s financial statements adding thousands of additional dollars in compliance costs. Now that we have discussed how small accounts accumulate and increase administrative costs, let’s focus on avenues to relieve the plan of surplus participants. Outlets for shedding the small accounts will vary based on whether the participant still works for the company and how the plan document is structured. If the participant is still employed, the options are very limited (and time sensitive). Auto enrolled employees who request to opt out of further contributions may be allowed to seek refunds of their contributions. IRS regulations state refunds may be processed within 90 days of the date of the first automatic contribution – assuming the plan document doesn’t specifically prohibit refunds. Diligence is required to encourage employees to act as this is a relatively short refund period. When dealing with balances left behind from former employees, the law is also structured with a mechanism to remove small balances via force out distributions. Using force out distributions, sponsors are able to distribute balances of under $5,000 without obtaining the consent of former employees. Nearly all plans we audit allow force out distributions, but in practice we see very few plan sponsors taking advantage of the provision. When we discuss this with sponsors, we usually find many have no idea what their options are and are also uncertain on how to proceed. At this point, we recommend they seek out a specialist. Trends in automation that result in small balances have created a market niche and specialized players have emerged. Among providers who assists sponsors in the removal of small plan accounts is Millennium Trust Company (“Millennium”). Millennium began specializing in 2005 and currently has agreements with over 30,000 plan sponsors who use their automatic rollover services. According to Mark Koeppen, Vice President of Millennium’s Rollover Solutions Group, Plan Sponsors were caught off guard with the long-term effects of auto enrollment. They anticipated the benefits but are surprised by the number of former employees that remain in the plan. Then the realization sets in, that they need to try and keep track of these former employees and continue to provide annual notices and other information. And importantly, costs are important. Based on average plan administrative costs, 75% of the cost is not recouped by revenue sharing or their fee structure, and the higher balance participants end up absorbing those costs. Clearly, we recommend having a well thought out strategy before adding an auto enrollment feature to a 401(k) plan. That said, even the best planned campaign can result in increasing the number of accounts with small balances. Knowing what to do with these balances can ease the administration burden and lower the costs to your plan and organization. Scott M Dufek, CPA | 03/19/2015
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