TRANSCRIPT:

Tom Hawkins: Welcome to episode 24 of the RCH Consolidation Corner Channel, where we provide audio content that explores key issues in the preservation and consolidation of retirement savings. In this episode, we look at the persistent problem of uncashed distribution checks, and offer what we believe is a “more enlightened” approach to resolving them. We hope you’ll find the audio enjoyable and informative.

NARRATOR: Today’s episode examines a critical but often underestimated operational challenge within defined contribution plans: uncashed distribution checks. Many plan sponsors dislike managing these outstanding payments, and for good reason – their administrative practices may place them at heightened regulatory and legal risk. A more strategic approach can significantly reduce both the volume of uncashed checks and the scrutiny they attract.

The current distribution check process is flawed at its core. Physical checks remain an outdated medium, subject to delays, loss, and mishandling during delivery. Mail systems are imperfect, and the behaviors of terminated participants are unpredictable – many fail to act on the checks they receive, and even the very distributions that they request. This combination leads to large numbers of uncashed payments that must be tracked and resolved. Ultimately, the system itself contributes heavily to the problem.

Regulators increasingly view uncashed checks as indicators of potential compliance issues. High volumes of outstanding checks are seen as “red flags” that can trigger audits. At the same time, both the absence of clear policies, as well as the presence of flawed ones can draw attention.

Underlying the uncashed check issue is the prevalence of small‑balance accounts across America’s defined contribution system. Roughly one‑third of all defined contribution accounts hold less than $7,000. When job changes occur – which they frequently do – participants with low balances often leave their accounts behind. Based on simulation data, approximately 6.2 million participants with balances under $7,000 change jobs each year, and about 2.5 million annually leave behind accounts containing less than $1,000.

Balances under $1,000 are particularly significant because plan sponsors are permitted to automatically cash out these amounts. While designed to streamline administration, this process introduces new complications. Automatic cashouts generate large numbers of physical checks, and many of them are never cashed. Longitudinal data from a large plan sponsor with more than 250,000 participants shows that about 10.5% of sub‑$1,000 distribution checks are never cashed, requiring follow‑up and eventual resolution by the plan. This pattern reinforces how administrative processes – rather than participant decisions alone – drive much of the uncashed check problem.

The implications go beyond administrative inconvenience. Because uncashed checks remain plan assets until resolved, sponsors must continue to manage and track them. Inadequate oversight increases fiduciary exposure. When checks remain outstanding in large numbers, regulators may question whether the sponsor has taken reasonable steps to locate participants, issue payments correctly, and maintain accurate records.

Additionally, the use of improperly handled forfeitures tied to uncashed checks is attracting increasing legal scrutiny. Recent litigation indicates that common practices – especially using forfeiture accounts to absorb these balances – may be inconsistent with fiduciary standards. As a result, sponsors must consider not only their operational processes but also the legal frameworks that govern how uncashed funds may be used.

A better, more forward‑looking strategy begins with reducing the reliance on physical checks. Instead of automatically cashing out balances under $1,000 and generating a wave of unclaimed payments, plan sponsors can incorporate these balances into an automatic rollover program. Under this model, small accounts – up to $7,000 – are transferred to a safe‑harbor IRA rather than being distributed as physical checks. This dramatically lowers the number of outstanding payments and strengthens overall fiduciary compliance.

Automatic rollovers also improve participant outcomes. Rather than losing access to retirement funds due to lost or uncashed checks, participants retain their savings in an account where funds remain invested and are easily portable. This helps reduce cashout leakage and supports long‑term retirement readiness – objectives that align closely with both regulatory expectations and participant needs.

In summary, uncashed distribution checks represent a persistent and multifaceted challenge. They arise from outdated processes, generate administrative inefficiency, and create ongoing regulatory and legal exposure. The most effective solution is not simply better check‑tracking but reducing the reliance on checks altogether. By adopting automatic rollover programs and integrating small‑balance accounts into safe‑harbor IRAs, sponsors can reduce operational burdens, avoid unnecessary red flags, and deliver better outcomes for the individuals they serve. This is the essence of a more enlightened, sustainable approach to managing uncashed distribution checks.

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