Question: Are employers required to search for lost participants?

TB: The burden to collect a vested benefit falls primarily on the former employee — the employee must apply for the benefit. Obviously, it is important for a terminated employee to inform a former employer of address changes. Certain information, such as the summary annual report and material modifications to the summary plan description that must be provided to participants, must also be distributed to former employees who have a vested benefit sitting in the plan. The employer must send this information to the last known address of the participant. The employer is also required to submit a schedule with the Form 5500 that includes information about vested benefits that have not been distributed. This information is supposed to be retained by the Social Security Administration, and the Agency is supposed to remind the former employee to apply for this benefit when he or she applies for Social Security benefits.

The most difficult issue for employers to resolve is what to do with benefits when a participant can't be found. An employer can force the participant to take a distribution when the vested benefit does not exceed $5,000. It is best for employers to cash out benefits less than this amount to eliminate the burden of keeping track of former employees. An employer cannot force a participant who has a vested benefit in excess of $5,000 to take a distribution prior to retirement age. The employer must wait until the former employee reaches retirement age to see whether he or she applies for the benefit.

I recommend obtaining advice from an ERISA attorney if the reason you are asking this question is to decide what to do with vested benefits of former employees that have not been claimed. You must follow the provisions of the plan and the applicable state laws.

Question: My company has a bank running its 401(k) plan. The bank won't come out and say how it figures charges. All charges are paid by the employees and are split according to the amount they have invested. The charges are too high and I would like to quit the plan and roll the money into an IRA. Does this violate any of the tax codes? If I'm not allowed to move my money, why is it that the bank can charge whatever they please and get away with it? (They intimated that it was 60 basis points, but based on what I was charged, it was more like 130 basis points.)

TB: Inadequate disclosure of fees continues to be a major source of frustration for many 401(k) participants. I have recommended to the Department of Labor (DOL) that they modify the Section 404(c) regulations which deal with this. These regulations currently require employers to provide adequate information for employees to make informed investment decisions. It is my opinion that the applicable fees are essential information for making informed investment decisions.

The law does not permit you to withdraw your money from the plan and transfer it to an IRA just because you are unhappy with the investments. A withdrawal is permitted during active employment only for a financial hardship or after age 59ý. Hardship withdrawals are fully taxable and a 10 percent penalty tax is imposed if you are under age 59ý. You cannot roll over a hardship withdrawal to an IRA, so this really isn't an option. You can stop contributing to the plan but that is a big penalty, particularly if there is an employer-matching contribution.

Unfortunately, there isn't any law requiring the service provider to disclose fees, which is why I have asked the DOL to modify the Section 404(c) regulations. I recommend sending a letter to the person at the bank who handles your plan, detailing your fee analysis and asking him or her for a response. This will give the bank an opportunity to either confirm that your results are correct or show you why you are wrong.

Question: How long can my employer hold my 401(k) deduction until investing it into my account?

TB: The actual requirements are a bit confusing because the DOL regulations aren't precise. By the way, the DOL regulations apply to when the money is deposited into the plan account rather than when the money is invested according to your investment selections. There aren't any regulations governing how soon the money must be invested in the specific funds you have selected.

Employers are supposed to deposit employee contributions into the plan as soon as they are able to determine the amount that should be deposited into the plan. For smaller companies, this is possible the day payroll is run. To be safe, employers should be depositing employee contributions within a day or two after contributions are deducted. Many employers prefer to make monthly contributions. While this is common practice, it should be noted that the DOL could give an employer that makes monthly contributions a hard time upon a plan audit, even though the contributions are promptly invested after the end of the month.

A lot of confusion was created when the DOL issued additional regulations a few years ago that gave the impression it was okay to deposit contributions within 15 days after the end of the month during which the contributions were deducted. The updated regulations in effect said that employers are definitely in trouble if the money isn't deposited prior to the 15th day of the month after the contributions are deducted. They could, however, still be in trouble even if contributions are deposited prior to this date, as explained in the paragraph above.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

Read Ted Benna's Biography

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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