DOL Eases Roll-Over Rules for Left-Behind 401(k) Funds

Author: Robert S. Teachout, XpertHR Legal Editor

August 16, 2019

The Department of Labor (DOL) has issued a final exemption to make it easier for employers to transfer 401(k) plan funds left behind by former workers to their new employers' plans. The rule is expected to help many employers in industries with high labor turnover (such as retail) who must keep records of numerous small accounts, try to track missing participants and deal with uncashed distribution checks. Employees are likely to benefit by having their retirement assets follow them more easily from job to job and consolidate their savings.

A 401(k) plan is a defined contribution retirement plan that lets employees defer a portion of their salary, on a pre-tax basis, up to an annual limit and not pay taxes on the interest earned until the funds are distributed.

Under current law, an employer may automatically roll over the balance of a former employee's 401(k) balance of less than $5,000 without the employee's consent to an IRA. The employee must affirmatively choose to opt out of the transfer in order to prevent it. The new rule's exemption goes a step further by allowing an employer to participate in a portability program that transfers such 401(k) funds to an ex-employee's 401(k) plan with their new employer.

The Employee Benefit Research Institute (EBRI) estimates that 14.8 million workers with retirement accounts change jobs each year and 36 percent of them have less than $5,000 in their account when they switch companies. More than half of those workers (54 percent) cash out their funds in the first year following their job switch, and 75 percent cash out by the seventh year. This behavior severely impacts these employees' future retirement income, experts say.

According to EBRI, the automated transfer of an employee's balance of $5,000 or less from a former employer's retirement plan to an account at a new company reduces the likelihood that employees will cash out their retirement plans when they switch jobs.