Years ago, a local drug store hired my middle daughter into her first “real job” as a retail clerk. She loved the work and servicing the public. She was also attending college full-time (and responsible for part of her costs). Despite my urging that she take advantage the store’s 401(k) profit sharing plan, she never deferred into the plan. However, the drug store made annual contributions to the plan on her behalf. After a few years, she changed employers and left her fully vested account balance sit. In January 2022, she received her account statement. It showed a $0 balance and a transfer out of all her retirement funds. Panicked, NOW she wanted my advice.
I would venture to guess that any retirement-dedicated financial advisor has addressed the question - “Why is my retirement account balance at $0?” - and not because of investment performance. Personally, I’ve encountered this or similar questions over the past several months due to a plan termination brought about through a private equity buyout of a client’s medical practice. Busy participants tend to ignore most of the required notices and other communications from retirement plan service providers, including those notifications dealing with plan terminations, general distributions, and forced rollovers.
Until the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was passed, plan sponsors could force a cash distribution to any participant whose vested account balance was less than $5,000 and who had not responded in writing within 30-days of being notified that a distribution was available. A check was cut less 20% federal tax withholding and, most often, the participant simply cashed the check and incurred a shock at income tax preparation time. Because of the leakage of retirement assets, EGTRRA changed the cash-out rule. Cash-outs could only happen to participants with less than $1,000 vested. If plan sponsors wanted vested account balances between $1,000 and $5,000 out of their plan, they had to adopt new plan provisions, follow the participant notification rules, and select an IRA provider willing to meet Department of Labor continued notification requirements.
Most, but not all plan sponsors have taken advantage of these rules. With the passing of SECURE 2.0 in December 2022, plan sponsors will be able to increase the limit from $5,000 to $7,000 for distributions occurring after December 31, 2023. Often overlooked and yet important, the funds attributable to a rollover can be excluded from the vested account balance limits.
As for my daughter, a quick online check of the rollover IRA provider’s access showed that her retirement assets were still hers, although a combination of fees and minimal interest credits were eating away at her account balance.
Do you know where your retirement plan assets are?
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