February 25, 2013

The Benefits of Mandatory Distributions

By Fred Reish and Bruce L. Ashton

Small 401(k) accounts of former employees increase plan costs, expand administrative obligations and extend fiduciary responsibilities. Plan sponsors should consider distributing these accounts under a well-defined process and regulatory safe harbors, and advisers can provide a valuable service to their clients by educating them on the benefits of mandatory distributions and helping them set up a routine process for sweeping out small accounts. By small accounts, we mean accounts of former employees with vested balances of $5,000 or less. (In determining whether an account falls under the $5,000 limit, amounts rolled over from a prior plan or IRA and earnings on those amounts are not considered. Thus, an account may have a larger total balance and still be considered a "small account" for purposes of this concepts discussed in this White Paper.)

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