Companies currently are under heavy pressure to reduce their costs and benefits departments are among the first places they look. In response, 401(k) plan sponsors can turn to rollover management programs, which establish procedures to manage terminated participants and provide them with access to assistance as they leave a plan. By managing the terminated participant population, plan sponsors can rebalance their ratio of current-to-former participants, and diminish the costs they incur for former employees' retirement benefits and their future legal risks.

The typical 401(k) plan has a significant percentage of terminated participants, thanks to a variety of factors, including automatic enrollment, regulators' request to cease automatic cash-outs of low-balance accounts, high turnover among employees and an increasing number of layoffs in today's economy.

In certain industries, the percentage of terminated participants in a plan can be as high as 30%. By removing them, a plan sponsor can possibly reduce plan costs, sometimes significantly.

Studies show that 401(k) plan participants often cash out their 401(k)s when leaving a job, particularly if they are young. Another common choice is to leave their savings behind in the plan. Either choice poses increased risks and costs to the plan sponsor. According to experts, terminated participants can be a source of future legal challenges, as participants and lawyers suggest that plan sponsors should have done more to keep the participants invested in retirement, or should have better managed terminated participants within the plan. The risk is partly due to the fact that many plan sponsors provide limited or no support services and guidance to participants who are leaving their 401(k) plans.

Best practices

Plan sponsors should make sure their rollover management program follows these best practices:

» Complies with Department of Labor regulations. According to DOL, plan fiduciaries must continue to give all participants plan summary documents, and in the case of terminated participants that fall within the automatic rollover threshold, notification of what will happen to their funds. They also must allow participants a reasonable amount of time to make a voluntary election before an automatic rollover.

Unfortunately, terminated participants often are difficult to locate. It's best to include an address look-up feature along with mail notification in order to demonstrate to DOL that every effort has been made to contact participants and to properly execute their rollovers.

» Is cost-friendly. Because plan sponsors need to cut costs, the program should not charge employers. And because a majority of rollovers involve low-balance accounts, the program's default (safe harbor) rollover IRA should have low fees that preserve the participant's savings. Safe harbor IRAs with high fees can quickly deplete savings, undermining the plan sponsor's goal of keeping the participant invested in retirement.

» Is easy to manage. A comprehensive rollover management program should have an easy getting-started process. It should align itself with the plan's recordkeeper, administrator and adviser so that it can perform without requesting time and assistance from the plan sponsor.

» Features objective funding options. Providing a selection of high-quality, low-cost investment options is in the participants' best interests. But there's an additional reason plan sponsors should provide high-quality, low-cost choices: risk reduction. The threat of being sued is an increasing concern for plan sponsors, particularly following the Supreme Court's 2008 LaRue ruling, which allows participants to sue plan sponsors for fiduciary breaches that negatively affect retirement savings.

» Offers continuous attention. An effective rollover management program is not a one-time event. Instead, it should continuously monitor the plan for terminated participants in order to prevent a buildup of terminated accounts.

» Includes multiple, strategic participant communications. Reaching participants several times in several ways is important to increase the response rate and number of rollovers. Communication plans can be designed so that plan sponsors provide assistance to each participant in a strategic fashion.

» Offers participant education. Many rollover transactions involve low-balance participants who do not have access to professional investment help. These participants need one-on-one support from a retirement planning professional before, during and after they transfer their money. Without the support, participants are likely to cash out or have their funds directed to their plan provider's affiliated fund family, some of which may carry high expenses.

» Features user-friendly interfaces. Each participant has a different level of investment experience and different needs. Those who are knowledgeable about their investments and are tech-savvy may want to complete their rollover online. Others who are less certain about investing and need support may want one-on-one assistance. An effective rollover management program should be able to satisfy either approach by offering an online rollover feature, as well as a call center staffed with licensed professionals.