Should You Keep Retired and Inactive Participants in the Retirement Plan?

Almost all the decisions made about the retirement plan are driven by employee wants and needs. When creating or changing the plan, it’s important to think about investing habits, aversion to risk, and goals for the future. Should you give similar attention to the wants and needs of your former employees? Under most defined contribution plans, former employees are permitted to keep assets in company plans even after they have left the company.  If your plan has low or reduced fees and a wide range of investment options, you may be inadvertently incentivizing former employees to stick around. Is it a good strategy to keep inactive participants in your plan? Will managing their assets help or hurt you in the long run?

Retirees Present an Opportunity

Now is the time to reevaluate your strategy for managing inactive participants. As your baby boomer employees retire, it may be advantageous to hold onto assets and capitalize on their investments. To help you determine the best approach, Wilson Lewis has provided insights on this approach.

Pros and Cons of Inactive Participants

If the plan encourages former employees to retain their assets in your benefit plan…

…it may cost more money.

Most plans charge a per-head fee for all participants, active or inactive. If you encourage former employees to stay invested, you should be prepared to pay this additional cost.

…it can lead to improved buying power.

More assets in a plan leads to improved buying power, which leads to more diverse offerings. Many small plans struggle to make their investment portfolios enticing to their employees simply because investment managers do not have the resources, they need to offer better options. Former employees’ asset balances will give you the ability to more closely tailor your investment options to your participants’ preferences.

…it will create a better position to negotiate fees.

When a plan’s buying power improves, so does their ability to negotiate fees. Don’t let former employees walk out the door with their assets before you understand what opportunities you may be losing if they do. And keep in mind that costs are a balancing act: smaller fees may offset the additional costs of retaining inactive participants.

…it may be difficult to select ideal investment options.

If your plan encourages retirees to stay, you will want to offer investments that are desirable for that generation. Retirees will almost always gravitate to low-risk options. Your active employees, on the other hand, may prefer risky investments with high rates of return. Procuring a selection that meets both populations’ needs may be difficult.

Encouraging Participation

It’s important to perform a cost-benefit analysis to see if keeping former employees invested in the plan will be worthwhile. If so, there are many ways you can encourage them to participate.

• Communicate clearly to employees about retirement plan options will be when/if they leave the company.
• Include bonds and other stable investments in the fund lineup to attract risk-averse retirees.
• Adjust plan documents to allow for rollovers from external IRAs or other qualified plans.
• Allow retirees to customize the frequency or amount of their withdrawals.

Questions?

Managing a 401(k), 403(b) or other retirement plans can be challenging for Atlanta companies. Finding the answer to this important question can help to identify which plan policies should be implemented. If you have questions about whether to retain inactive plan participants or need assistance with your benefit plan audit, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.