By Thomas Hawkins | February 9, 2017

Now that we’re in the thick of flu season, we’re reminded of Ben Franklin’s famous axiom: “an ounce of prevention is worth a pound of cure.” A yearly flu shot is perhaps the best example of an effective, preventative action you can take to minimize your odds of catching the flu, and keep you breathing more easily than those who haven’t.

Similarly, retirement plan sponsors can take preventative steps to minimize the incidence of uncashed distribution checks, as well as to resolve the situations that inevitably occur.

The Problem of Uncashed Distribution Checks

Uncashed distribution checks occur when retirement plan participants fail to cash or deposit a distribution from their qualified retirement plan, for a variety of reasons.

Uncashed, or stale-dated distribution checks typically occur under the following circumstances:

  • Plans elect to cash out separated participants with balances of less than $1,000. It’s all-too-common for these checks to go uncashed, and this scenario represents the single-largest cause of uncashed checks for qualified plan sponsors.
  • Participants will request 401(k) plan distributions at their normal retirement age, or required minimum distributions at age 70-1/2 -- yet they never cash their checks.
  • Physical checks of any amount that are returned as undeliverable by the U.S. Postal Service.
  • Checks of any amount that are requested, but simply not acted upon by the participant.

Because uncashed distribution checks are considered plan assets, plan sponsors continue to incur administration costs while participants are separated from their retirement savings. Additionally, uncashed check funds will typically accumulate no interest or earnings, and if mishandled, can represent a potential fiduciary risk to plan sponsors.

Finally, as the numbers of small-balance 401(k) accounts grow, driven by auto enrollment in 401(k) plans, uncashed distribution checks can occur more frequently.

Effective Solutions for Uncashed Retirement Plan Distribution Checks

Fortunately, there are solutions that can minimize the problem to begin with, while also dealing effectively with the situations that do occur.

The “ounce of prevention” to minimize the occurrence of uncashed distribution checks includes:

  • Implementing an automatic rollover(or safe harbor IRA) program for all separated participants with less than $5,000. Be sure to include accounts with less than $1,000 in the automatic rollover program, as many plans elect to cash out these participants, unwittingly creating an even larger problem with uncashed distribution checks.
  • Periodically updating your records for lost or missing participants. Many separated participants do not maintain current information. A cost-efficient participant location service can increase the odds that mailed, physical distribution checks will reach their intended destination.

To deal with the uncashed distribution checks that may still arise:

  • For uncashed distribution checks less than $5,000, working with an automatic rollover service provider to roll over these funds to a safe harbor IRA, established in the name of the participant. Upon opening and funding of the safe harbor IRA, your plan will be deemed to have fulfilled its fiduciary responsibilities. Ongoing, the automatic rollover service provider should continue to perform searches in order to re-unite the participant or their beneficiary with their retirement savings.

By taking these actions, plan sponsors can avoid large numbers of uncashed distribution checks, along with the administrative burden and fiduciary risk that they can bring.