Some plans sponsors go to greater lengths than others to find ways to reunite former employees with their retirement funds.
After leaving his Home Depot job in October 2009, an employee requested that the $23,000 in his retirement account be rolled over into an IRA. Home Depot's record-keeper -- Aon Hewitt -- sent a check directly to the employee's new record-keeper. Six months passed. The check was never cashed. So a second letter was mailed, alerting the ex-employee that his retirement funds were in limbo.
That same year, another employee at Home Depot passed away. Aon Hewitt mailed the beneficiary a distribution check in September for the balance in the retirement account -- more than $39,000. By May, the check still wasn't cashed. So a second letter was mailed, reminding the beneficiary of the funds.
Sounds a bit crazy, especially during a recession -- people neglecting to cash distribution checks or ensure that funds are rolled over into an IRA. But it happens. Frequently. In most cases, account balances contain several hundred, not thousands, of dollars. Either way, employers (namely, HR executives) or plan sponsors aren't off the hook, according to the Employee Retirement Income Security Act. They have a fiduciary obligation to act in the best interests of participants and beneficiaries.
But how that's accomplished is left up to the HR leaders. They can decide how much they want their department to participate in the search process. Many watch from a distance, relying on their record-keeper and its policies. Others tackle this head-on, working side-by-side with record-keepers to create effective policies and procedures that track down former workers and reunite them with their cash.
There are basically three rules plan sponsors must follow. According to the Economic Growth and Tax Relief Reconciliation Act of 2001, employers can automatically send ex-employees distribution checks if the balance in their retirement account is less than $1,000. If between $1,000 and $5,000, the plan sponsor must present the individual with two options -- either cash out their account or roll it over into an IRA. If it exceeds $5,000, then the funds must stay in the 401(k) until the participant contacts the plan sponsor with specific directions for those funds.
While this is a common problem for many companies, some believe it's beyond anyone's control; they blame human nature. Employees simply forget, procrastinate or have higher priorities than updating HR with new contact information.
The Home Depot Fix
To minimize its incidences of lost nest eggs, Home Depot developed a process several years ago that updates contact information for active employees on a quarterly basis, says Brant Suddath, director of benefits at the Atlanta-based home-improvement giant.
"We've got 300,000 benefits-eligible folks [worldwide]," he says. "So at anytime, thousands can have a bad address on file. Every quarter, 1,000 employees are contacted because of a bad address."
While some 40,000 former employees keep funds in the company's retirement plan, Suddath says, HR doesn't track what percentage represent abandoned accounts. But it does manage the overall search process, including outsourced activities conducted by its record-keeper.
Employees who either quit or are terminated are forced out of the company's retirement plan if their balance is less than $1,000. If participants have a valid address on file and have not called to direct the payment of their balance, a distribution check is mailed to their address. But if the check isn't cashed within 60 days, he says, their account is flagged.
The record-keeper then mails them a certified letter, alerting them to their stale-dated check. If participants don't contact the record-keeper within 60 days for another check, a second attempt to reach them is made via certified mail. If still no response, Home Depot then relies on a local HR consulting firm that conducts address searches. If an address is found, a third letter is sent via certified mail, notifying them about their balance and requesting that they contact the record- keeper.
The names of the remaining group of employees -- those who have not responded to past letters -- are turned over to the IRS' letter-forwarding service, which then sends a fourth and final letter. Along the way, Home Depot and Aon Hewitt also call and send emails when such contact information is available. But if all else fails, money is reinvested back into the participant's 401(k).
"Unfortunately, there's still more than a handful of folks we don't connect with," says Suddath, adding that a few stale-dated distribution checks have ranged between $15,000 and $25,000. "There is a fiduciary responsibility here for defining a process and following through. My advice is to work with your ERISA counsel to see how far your responsibility goes in connecting former employees with their money."
While Home Depot is directly involved in search activities, other plan sponsors rely on their record-keeper's existing processes. According to a spokesperson for Aramark, when employees resign or are terminated, Aramark directs those individuals to its Fidelity provider to coordinate changes regarding their retirement account.
The search process typically kicks in when a piece of mail, such as an account statement or small distribution check, returns undeliverable, says Donna Norwood, senior vice president of defined-contribution product at Fidelity Investments' Smithfield, R.I., office.
"We use a third-party vendor . . .," she says. "They use a number of searches to identify this person -- U.S. Postal Service [that maintains] the National Change of Address [registry], Social Security Administration, phone records, property-transaction records, anything [that can help] find the most recent and accurate address."
If the person isn't found, the process is repeated six months later. After one year, Norwood says, the person's account is flagged and the plan sponsor then decides whether to continue the search.
It's important that plan sponsors understand the tracking process used by third-party vendors and ensure that appropriate security measures, such as encryption, are being used, especially since proprietary information is being transferred. "Once they understand that and how it actually works, they can have a comfort level that they're doing the best thing they can to find their [former] employees," she says.
Norwood suspects tracking ex-employees may be more prevalent in industries such as retail and hospitality that typically experience double-digit turnover. But regardless of industry, she says, it's ultimately the plan sponsor's responsibility for finding workers who dropped off the radar screen.
Considering the massive amounts of personal information housed on the web and the fact that more people are cognizant of their 401(k)s -- partly due to the recession -- she's optimistic that such incidents will diminish over time. Meanwhile, she says, Fidelity claims a 75-percent success rate in finding past employees.
"My hope is, in the future, this won't happen as much," Norwood says. "We're getting to the point where we're identifying some of these addresses a little bit better and having more success getting in touch with people."
While no process offers 100-percent success, HR must be proactive in this matter. For example, not all employers require exit interviews and, therefore, miss a key opportunity to collect contact information, says Stephen F. Herbes, principal of his own law firm in Short Hills, N.J., that advises clients on ERISA compliance and other employee-benefits issues.
"During exit interviews, give employees a form to fill out or offer a link on your website to update new addresses, then have a procedure in place when someone slips through the cracks," he says. "It will help avoid a lot of administrative headaches down the road."
Likewise, without a documented process, some HR departments unnecessarily expose their employer to employee lawsuits. Since courts examine whether HR decisions are reasonable, Herbes says, the lack of documentation can really hurt HR when trying to justify its actions.
Typically, organizations that are successful are more vigilant along the way, adds Michael Volo, practice leader at Cammack LaRhette Consulting in Wellesley, Mass., which specializes in retirement plans. By routinely mailing or emailing information to plan participants, employers will know which addresses are stale.
Many plan sponsors prefer to remain out of the loop and outsource the search process to their record-keeper, he says, adding that this is one reason for the diminishing number of plan sponsors that deal directly with employees.
However, a hands-off approach may not be the best tactic. HR needs to ensure that aggressive search polices are being implemented, mainly because managing numerous retirement accounts with low balances can lead to higher pricing. The higher the average account balance, says Volo, the lower the price plan sponsors usually pay per participant.
"So, [quickly] getting these small balances out of the plan not only alleviates the administrative burden of having to track [down] those individuals, but it also helps from a pricing perspective for the plan sponsor to get better value," he says, adding that there may not be a full fix.
"We can't change human nature," he says.