As U.S. employment mobility has increased, one result of an estimated 9.5 million job changes a year has been a large number of defined contribution retirement accounts left behind at former employers. These often are small in dollar value, but can become a more costly and “insidious” problem than many plan sponsors realize.
Small accounts of former employees who haven’t yet reached retirement age “increase plan administrative expense, expose plan sponsors to greater fiduciary responsibility and impair effective plan administration,” said Millenium Trust Co. in an October report titled, “How Big Is the Problem? The High Cost of Accounts Left Behind.”
At first glance, the expense of administering “orphan” accounts with small balances may seem relatively trivial. But according to Boston Research Group statistics quoted by Millenium Trust in its report, the number of former employees’ retirement accounts under $5,000 is growing, generating cumulative costs that do add up.
Although Millenium Trust acknowledges “sparse data” is available on the subject, the report presents research to quantify the costs of maintaining low-value accounts for many ex-employees. It also explains one solution available to plan sponsors that have several of these accounts on their books.
Almost 88 percent of eligible employees had a balance in their employer’s DC plan in 2012, the Profit Sharing Council of America’s 56th Annual Profit Sharing and 401(k) Survey said. That rising number of active accounts is attributed to improved participation from automatic enrollment programs at many plans. Yet increased plan participation hasn’t led to greater employer loyalty. The U.S. Bureau of Labor Statistics reported that as of January 2012, its last biannual report on wage and salary worker tenure, the median number of years all U.S. wage and salary workers stayed with employers was 4.6. The median tenure for workers aged 25 to 34 was lower at 3.2 years.
With an estimated 9.5 million job changes per year (see related August 2014 story) as calculated by Retirement Clearinghouse, an independent manager of employee job changes for plan sponsors, the abandoned plans can start to add up. Boston Research Group, a firm that provides proprietary market research to companies, figures that about 38 million accounts of former employees exist in DC plans alone, the Millenium Trust paper said.
Unless a plan is terminating, or in some cases when a mandatory payout is required, plan sponsors must keep accounts for participants who have separated from service until the participants reach full retirement age. As a result, the plan sponsors holding these accounts have to keep track of former employees, which may create both cost and fiduciary concerns. Boston Research Group said:
To understand the cost of stranded accounts from a DC system perspective, simply apply the [median] recordkeeping, custody and administration fee of $92 [per account per year] (source:NEPC) to the 38 million stranded DC accounts [to arrive at an annual cost of about $3.5 billion]… Assuming growth of 5 percent in stranded accounts (about 1/3 the annual turnover rate in the job market) and flat annual recordkeeping costs, this number grows to $43.5 billion over a 10-year period.
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