The Challenges of Forgotten Retirement Benefits
Forgotten retirement benefits pose unique challenges for employees, former employers and plan administrators.
They can cause employees to lose money that rightfully belongs to them. Employers may face higher plan costs and the fiduciary risk of mishandling the forgotten funds. And plan administrators can get bogged down in searching for former employees, dealing with uncashed checks, and administering accounts they often aren’t sure what to do with.
For example, administrative costs for ex-employees can add up. If the employer orders a 401K to be cashed out and paid to the employee, the check is issued with taxes withheld. If it’s an early withdrawal, the participant faces additional penalties. If the check goes uncashed or is returned because of a bad address, the employer is never notified. The money sits in the bank earning interest for the bank, but not the employee.
You may wonder how retirement plans get forgotten in the first place. The fact is, most people don’t think about moving their 401K when they change jobs. With all the other changes that occur when switching employers, their retirement plans can easily get lost in the shuffle – especially when the employee has a small balance in their account.
As a result, many retirement plans are unwittingly left with the former employer. And if the employee moves and fails to send an updated address, the money goes unclaimed and is often permanently lost.
What Can Employers Do?
To help prevent lost retirement accounts, employers should adopt a “You matter to us” approach with all new employees. Within the first few days, have human resources ask the employee if they left behind a retirement account. If so, HR can provide information about the employee’s options, such as rolling over their old account to the 401(k) plan at new job. If the employee decides to leave their account where it is, the importance of keeping in contact and providing their current address can’t be overstressed.
When it’s time for annual open enrollment, employees should verify their own address plus their beneficiary contact information for retirement plans and life insurance policies. The named beneficiary on a retirement plan or life insurance policy trumps what is in an employee’s will.
To avoid the problems with uncashed checks, employers can take a proactive role by requesting an annual accounting of all uncashed checks from the plan. The only red flag to employees is the difference between what they filed on their taxes and what the IRS says they owe. Employers have several options, including conducting a search for the “missing participant” and/or rolling over the assets into a Default IRA account. These will uphold the employer’s fiduciary responsibility and protect the employee’s assets until they are claimed.
PenChecks Trust offers a free service – the National Registry of Unclaimed Retirement Benefits – to employers and individuals to help reunite employees with their forgotten benefits. Their secure web site allows people to search by social security number to determine if a former employer has registered them on the site as having an unclaimed retirement account.
Employees Should Be Proactive Too
There’s a lot of unclaimed money out there in addition to forgotten retirement accounts. At least once a year everyone should search their state unclaimed property site for forgotten bank accounts, uncashed checks, utility deposits, refunds, rebates, stocks, bonds, CDs, gift cards, safe deposit box contents and more.
“Customer-initiated activity” is the key to preventing your accounts from going to the state. Once a year make a deposit or withdrawal, log into the account, call and check the balance – anything to prove you haven’t forgotten it. The mere fact that your savings account is earning interest does not constitute customer-initiated activity.
Even if you searched before and found nothing, it’s time to check again because new listings are added all the time. I recommend unclaimed.org, the official site of the National Association of Unclaimed Property Administrators. All states are accessible, and it’s free to search and claim.
It’s also a good idea to search for deceased family members who may have left behind a life insurance policy or other estate money that the family knew nothing about. Making sure family members know about these assets is a conversation everyone should have.
As a consumer advocate, I advocate for taking steps to prevent money from getting lost in the first place.
- Have customer-initiated activity on your accounts at least once a year.
- Cash every check as soon as you get it.
- Rollover your retirement plan to your new employer or to your own IRA.
I wrote The Little Book of Missing Money: A Quick and Easy Guide to Finding Money that is Rightfully Yours, to help people find money they may otherwise never get. There are more places and ways to search than what can be covered in a blog. The 4th Edition is in production and will be available soon.
Speaker, author and consumer advocate Mary Pitman believes no one should have to pay a ransom to get their own money. She has appeared on Good Morning America and America’s Money Class with Suze Orman, and has been featured in AARP Magazine, CNNMoney and more.