Plugging the Leak: Uncashed Distribution Checks

Drip… drip… drip. The slow drip of defined contribution plan leakage continues.

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.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

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.

Advisers Giving Back: When People Need a Head Start

After learning about the work of Head Start, George P. Fraser decided to provide financial education to parents of students in the program and build a scholarship fund for the teachers employed there.

Art by Tim Bower


George P. Fraser, who has been a retirement plan adviser for over two decades, wanted to get into the 403(b) business. After a trip to educate a potential client, he himself came back educated—and excited, he says.

When visiting a foundation that is a member of the Region 9 Head Start Association, now an actual client, Fraser learned about Head Start, a program of the U.S. Department of Health and Human Services (HHS) that provides comprehensive early childhood education, health, nutrition and parent involvement services—getting parents engaged in the school activities of their children—to low-income children and families. “I didn’t know anything about Head Start before,” Fraser says. “But I learned that a child who goes through its pre-K program has a much better chance of doing better in school and later in life.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The Scottsdale, Arizona-based managing director and financial consultant at the Fraser Group at Retirement Benefits Group says his drive to help others started in the early years of his career, which he spent at wire houses. “My first branch manager at a wire house said, ‘You do these retirement plans to get the wealth business of senior execs,’ but that was not the way I wanted to do business. I want to treat all people the same way. I don’t do any wealth management,” Fraser explains.

At the foundation, he asked the director, “What would you think if we came back in and fed parents and provided financial literacy education to them? She said that was also a part of parent services and she’d love help, but she didn’t believe we would follow through on what we said,” Fraser recalls. “That’s the reputation [advisers] have in this business.”

The first financial education meetings were actually held for the foundation employees. “They were ecstatic,” Fraser says. In one meeting, he recalls, a woman there told him about some struggles she was having. Her ex-husband had passed away, and she had inquired about his union pension. The union said it needed a qualified domestic relations order (QDRO) as well as the divorce decree. There was no QDRO. Fraser helped submit all necessary paperwork, and, after four months, the woman still hadn’t heard back from the union. The union said it’s paperwork was with its attorney, but would not provide the attorney’s contact information. With the Fraser Group’s help, the end result is, starting on her ex-husband’s 50th birthday, she’ll get his pension income, Fraser says.

But the Fraser Group’s actions didn’t stop there. Fraser asked if he could provide piggy banks for all of the students that the foundation serves and give them lessons about saving. “[The director] loved that idea,” Fraser says. “Children aren’t taught how to save very well, and even schools don’t teach it.”

He also learned that many of the Head Start teachers live in the same kind of financial straits as their students’ parents—in many cases receiving pay below the poverty line. Some are trying to afford the cost of additional schooling to further their careers.

The Head Start regional director told him they tried to offer scholarship money, but had only been able to give out $3,000 for all of the region, which wasn’t much.  So he went to colleagues, the mutual fund vendors he works with, and collected more than $27,000 for scholarships.

Fraser points out that Region 9 encompasses Arizona, California, Nevada, Hawaii and the Pacific Islands—a huge geographical area, having  218 Head Start centers and many, many needs. So he decided to reach out for help.

“You can do good and still do good business,” he says. He notes that, on a daily basis, the Fraser Group may have 20 calls from investment company vendors wanting to put their investments in the firm’s plans. So, he has been using the occasion to ask if they would be willing to participate in a program to help promote financial literacy. “I’m giving them the opportunity to go above and beyond what they do for me. So they will be getting involved in providing food, handing out piggy banks and teaching financial basics to students.”

Thanks to these conversations, as the program evolves, piggy banks—supplied by OneAmerica—will be handed out to every child in Head Start Region 9. Other providers will help with teaching financial basics to students and their parents, as well as give away favors such as t-shirts, bags, etc.

“I love what Head Start does, and I’ve been looking for more ways to give back,” Fraser says. “I also love the ability to encourage others to be engaged in this kind of work.”

«