In today’s complex benefits landscape, plan sponsors face the challenge of managing retirement plans efficiently while ensuring compliance and participant satisfaction. One effective solution is the practice of involuntary cash-outs, which involves automatically distributing the retirement accounts of former employees when balances fall below a specified threshold. Integrating this provision into employer-sponsored retirement plans offers several advantages from the plan sponsor’s standpoint. The Secure Act 2.0 recently raised the involuntary cash-out threshold to $7,000, effective 2024. This shift marks a pivotal moment for retirement plan management, steering us towards deeper exploration of impacts and benefits.
Mitigating Fiduciary Risk
By proactively managing small balances through involuntary cash-outs, plan sponsors mitigate fiduciary risk associated with maintaining accounts with minimal balances. Involuntary cash-out provisions help plan sponsors comply with regulatory requirements, including those related to uncashed checks, missing participants, and unclaimed property. By facilitating timely distribution of retirement assets, sponsors decrease the plan’s overall fiduciary risk.
Improving Participant Outcomes
Reducing the number of dormant accounts through involuntary cash-outs contributes to the long-term sustainability of the retirement plan. Many recordkeepers charge fees based on the number of participants with a balance. Plan sponsors can reduce the overall fee by removing terminated participants with a balance below $7,000 from the plan. This optimization of plan resources can improve participant outcomes and can reduce expenses for plan sponsors and participants.
Incorporating involuntary cash-out provisions into employer-sponsored retirement plans yields tangible benefits for plan sponsors, including operational efficiency, fiduciary risk mitigation, regulatory compliance, and plan sustainability. By embracing these provisions, sponsors can enhance the overall effectiveness of the retirement plan, ultimately benefiting both the organization and its employees. To learn more on how you can improve your organization’s retirement plan, contact the team at Innovative by calling (856)-242-3343 or emailing resources@iifria.com.
