Small 401(k) accounts of former employees increase plan costs, expand administrative obligations and extend fiduciary responsibilities. Plan sponsors should consider distributing these accounts under a well-defined process and regulatory safe harbors, and advisers can provide a valuable service to their clients by educating them on the benefits of mandatory distributions and helping them set up a routine process for sweeping out small accounts. By small accounts, we mean accounts of former employees with vested balances of $5,000 or less. (In determining whether an account falls under the $5,000 limit, amounts rolled over from a prior plan or IRA and earnings on those amounts are not considered. Thus, an account may have a larger total balance and still be considered a “small account” for purposes of this concepts discussed in this White Paper.)
This White Paper discusses the reasons for – and benefits of – making mandatory distributions on a regular basis and the regulatory guidance related to these distributions under the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA). We also address whether financial advisers may be compensated in connection with such distributions. In the Discussion and Analysis section of this White Paper, we summarize the issues and rules and discuss services that can assist plan sponsors and advisers in handling mandatory distributions. In the three Appendices, we describe the regulatory guidance in greater detail – for those who want a deeper understanding of the legal underpinnings for our conclusions.
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