Automatic rollover programs allow plan sponsors to force out of their plan separated participants with balances less than $5,000 into a Safe Harbor IRA. These programs can be quite effective at helping sponsors resolve many of the problems associated with housing small-balance accounts in-plan, such as:
- Higher levels of missing participants
- Increased administrative costs and workload
- Higher recordkeeping fees
- Lower average account balances
While the benefits are well-known, there are some common misconceptions about automatic rollovers. To ensure that plan sponsors can adequately fulfill their fiduciary responsibility to participants, we’ve identified the five most important misconceptions that are important for sponsors to understand and avoid.
Misconception #1: It’s best to cash out participants with balances less than $1,000
Often times, plan sponsors believe that they should automatically distribute (cash out) separated participants with balances less than $1,000. After all, it’s quick & easy, it’s allowed, and those participants would likely have cashed out anyhow. Right? Not so fast.