Plugging the Leak: Uncashed Distribution Checks

Plan sponsors have taken many actions to preserve and protect retirement savings. They’ve restructured loan provisions, offered partial distributions, changed investment options and accepted roll-ins from other plans.

Now, the Department of Labor is focusing on an additional type of leakage—uncashed checks.

Uncashed checks are a lot like a leaky faucet. The magnitude of the issue isn’t always recognized and, as a result, it can go unaddressed for a significant period of time.

However, advisers need to remember that there is a proven, industry-accepted solution for effectively reconnecting missing participants with their lost retirement plan assets. Automatic rollovers provide a great option for addressing the rising amount of uncashed checks that affect defined contribution plans across the country.

But to better understand the solution, let’s first look at the magnitude of the problem.

Assessing the Issue of Uncashed Checks

For decades, uncashed distribution checks were a relatively minor issue for retirement plans. The amount of uncashed checks was not considered ‘material.’ A number of factors caused that to change.

In 2013 testimony before the ERISA Advisory Council, James Haubrock, then an American Institute of CPAs executive committee member, explained the following: “The trends toward plans providing for automatic enrollment in 401(k) plans, employees holding multiple jobs during their careers and leaving their retirement accounts with their ex-employer when they change jobs, and employers’ automatic distributions of former employee account balances of less than $1,000, are contributing to an increase in the amount of unclaimed benefits and uncashed benefit checks.”

Industry organizations and regulators have been trying to quantify the issue of uncashed checks. In January 2018, the Government Accountability Office reported more than 25 million plan participants had left at least one account behind in a previous employer’s plan from 2004 to 2013. 

This year, The SPARK Institute conducted a member survey to better understand the issue. The 10 member firms participating in the survey issued more than four million checks in 2017. Of those, about 185,500 checks (4.5%) were not cashed. (These member firms work primarily with ERISA plans, but some non-ERISA plan data may have been included.)

In general, uncashed check amounts were relatively small. SPARK reported the vast majority of the checks were issued for $1,000 or less. Many are sent when the balance of a terminated employee’s plan account is $1,000 or less; a participant reached the required beginning date for required minimum distributions; excess loan repayments needed to be refunded, or small amounts were left behind because of dividend payments or post-termination matching contributions.

All of these small amounts add up. When participating member firms’ 2017 uncashed checks were aggregated, the value was $47 million.

When uncashed checks were returned, the diverse processes employed by SPARK members typically resulted in the assets being returned to the participant’s account, sent to the plan’s forfeiture account or rolled into an IRA. SPARK members indicated that relatively few ERISA plans enter uncashed checks into their states’ escheatment processes; however, some non-ERISA plans do.

An Alternative Solution: Expand Automatic Rollover IRAs

There is a way for plan sponsors to manage issues related to uncashed checks more effectively. Instead of issuing checks, expand the use of automatic rollovers. 

Currently, when participants leave assets in plan accounts, 58% of plans transfer balances of $1,000 to $5,000 into Safe Harbor IRAs. When account balances are smaller than $1,000, most plan sponsors send checks to participants’ last known addresses.

In an effort to minimize issues associated with uncashed checks, some plan sponsors have begun to roll over accounts with balances of less than $1,000 into Safe Harbor IRAs. They have amended plan documents so all terminated employees’ accounts with balances of $5,000 or less can be automatically rolled over into IRAs.

Other plan sponsors have amended their plans to establish a threshold amount under which rollovers of terminated employees’ accounts (with balances of $5,000 or less) are not processed in order to protect extremely low balance accounts from multiple distribution and transfer fees.  Either of these approaches will dramatically reduce the number of uncashed distribution checks in plans. Based on the aforementioned survey data from SPARK, 78% of those uncashed checks were below $100.

Regardless of whether or not a plan sponsor wishes to amend their plans, all plans  should establish search processes to help ensure they have correct addresses for former employees before checks are sent. This is particularly important today, as the DOL said earlier this year that they were increasing their focus on missing participants. An effective search process can also limit exposure to uncashed checks.

Automatic rollover IRAs are a well-established solution for issues related to abandoned accounts and missing or non-responsive participants. It is the only solution that offers an explicit safe harbor for plan sponsors and recordkeepers. It may also be an immediate solution if the infrastructure exists and the agreements are already in place.

By lowering the threshold for automatic rollovers to amounts less than $1,000, plans can eliminate many of the issues associated with uncashed checks.

Editor’s note:

Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. He has over 40 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.