More than 30% of those who responded to the Pew survey said that lower fees in their current ESRP were among the top three reasons to remain in the plan during retirement. Many 401(k) plan participants are unaware of how their retirement savings can be impacted by administrative and investment fees, even upon retirement when rollover decisions must be made.

While fee savings may not a primary focus for your retirement plan participants, it’s important for employers to understand the advantages for participants electing not to move their savings to an IRA:

• Plan participants can generally withdraw funds from their ESRP without a 10% penalty if they leave their employer at age 55 or older. An IRA requires an individual to be at least 59 1/2 to avoid this penalty.
• Plan participants may be eligible for favorable tax treatment on withdrawals if the ESRP is invested in company stock under the Net Unrealized Appreciation rules.
• The Bureau of Labor Statistics estimates baby boomers will have an average of 12 job changes during their careers. Being able to consolidate prior ESRP accounts and IRAs into their current ESRP can resolve issues of inappropriate asset classes that may not fit the participant’s age or risk tolerance.
• An ESRP may provide access to institutional share classes with lower fees that are not available in an IRA.
• The ESRP may offer access to stable value funds or fixed fund investments, which may not be available in an IRA. These funds can carry low investment fees and competitive interest rates.
• Required minimum distributions (RMDs) from the ESRP can be avoided for employees who continue working. With IRAs, however, distributions must start by April 1 of the year after the individual reaches age 72.
• Mega back-door Roth 401(k) conversion offers a tax strategy that may be available through the ESRP, allowing substantially greater amounts into the Roth provision.

The approach to keep their savings in the ESRP isn’t likely to appeal to all employees. Retirement plan participants who want more control of their investments may decide to choose a rollover to an IRA. In addition, employers should carefully consider their fiduciary obligations, which include sending periodic plan notices requiring current contact information for former employees. 

Plans can evolve today to meet the needs of plan participants who wish to roll over — or not roll over — their assets. Providing options for plan participants begins with setting objectives and establishing a strategy.