In the spirit of Financial Literacy Month, retirement plan sponsors are to be commended for their commitment to enhance financial wellness among participants. In fact, 76% of employers offer financial health programs for employees, according to the seventh annual survey on corporate health and well-being conducted by Fidelity Investments and the National Business Group on Health® in 2016.
Financial wellness programs are an important and valuable benefit because many working Americans have significant financial worries. According to the results of a Fidelity Workplace Investing survey conducted last year, 29% of Generation-Xers and 24% of Millennials are concerned about making ends meet all the time. Furthermore, 38% of Gen-Xers and 25% of Millennials spend $2,000 or more on debt every month.
However, by automatically cashing out terminated participants with less than $1,000, sponsors seriously undermine their own efforts and send a contradictory message that retirement savings are only worth preserving if the balance is above a certain amount. In wellness terms, prematurely cashing out is the equivalent of going out for two Big Macs, an apple pie and a large milkshake right after running three miles on the treadmill at the gym, and is clearly the worst decision a participant can make regarding their retirement savings. And it is a widespread problem. The Plan Sponsor Council of America’s 58th Annual Survey of Profit Sharing and 401(k) Plans reports that 88.7% of defined contribution plans automatically cash out stranded accounts with balances below $1,000.
To be fair, plan sponsors are often acting in the overall interests of their plans and their active participants. The unintended consequence of auto enrollment has been a sharp uptick in small, stranded accounts in plans, and automatically cashing out the smallest of these accounts is often the easiest option for sponsors, since many participants will neglect their accounts, leaving their former employers’ plans with a glut of small accounts that can become a source of unnecessary plan expenses and administrative headaches.
Also, most plan sponsors don’t yet have access to an inexpensive and automated solution for moving participants’ accounts forward to their new-employer plans, a solution known as auto portability—which will become operational in July of this year. Nevertheless, until this solution is rolled out, and the infrastructure enabling the widespread adoption of auto portability is built by all record-keepers, plan sponsors can take steps to reduce cash-outs and improve their participants’ financial well-being.
Training for the Financial Wellness Triathlon
No one can go out and run a triathlon on the same day that they decide to improve their level of physical fitness. Usually, after choosing to make positive changes in their lives, they have to adopt a fitness regimen that will help them gradually prepare to complete a triathlon. These workout routines can begin, for example, with calisthenics, then expand to include running, and eventually, swimming. The different exercises come together to create a well-rounded fitness regimen that strengthens various parts of the body over time so that a person can eventually finish a triathlon and accomplish other long-term fitness goals.
Similarly, plan sponsors can take small, concrete steps as part of a financial wellness regimen to improve participants’ retirement outcomes—even while they’re waiting on the infrastructure to facilitate widespread auto portability, which would enable them to complete the metaphorical triathlon.
These are the exercises that should be part of a sponsor’s “fitness” plan to improve participants’ financial well-being by discouraging cash-outs:
- End Automatic Cash-Outs: Instead of automatically cashing out accounts with less than $1,000, sponsors can automatically roll them out of their plans and into safe harbor IRAs. These investment vehicles are not the ideal long-term option, but they at least allow retirement savings to be preserved. Refusing to cash out small accounts sends a positive message that all retirement savings balances, regardless of amount, should be preserved in the U.S. retirement system. This practice would also eliminate the problem of uncashed checks (since no checks with cashed-out balances would need to be sent to terminated participants) while decreasing a plan’s small, stranded accounts.
- Actively Encourage Roll-Ins: Sponsors’ human resources departments can organize educational and awareness campaigns to encourage employees to consolidate their accounts stranded in former-employer plans into their active plans. Touting the benefits of roll-ins for participants, and even offering full or partial assistance with the roll-in process (given its complexity and cost) will go a long way toward helping more Americans preserve and increase their retirement savings.
- Work with an Automatic Rollover Service Provider Focused on Moving Retirement Assets Forward: If a sponsor has a mandatory distribution program, they should evaluate automatic rollover providers based on their level of commitment to reducing cash-outs and moving retirement assets forward. The most important metric should be “percentage of assets retained,” as measured from the date the initial communication is sent to the participant.
While fees and safe harbor IRA investment returns are solid criteria for evaluating automatic rollover providers, they can be misleading because they don’t take into consideration the provider’s ability to retain assets and prevent cash-outs. Sponsors should check whether or not automatic rollover providers train and utilize their call center staff to actively dissuade participants from cashing out. For example, are the call center personnel trained to talk participants “off the ledge” and keep their savings preserved for retirement? Will those same call center staff members proactively help a participant move their savings forward to a current 401(k) or existing IRA after they roll those assets into a safe harbor IRA?
Preservation of small savings matters for participants’ financial wellness. The benefit involves encouraging saving behaviors—an “exercise regimen,” if you will—that can keep participants financially fit for their entire working careers, thus ensuring better retirement outcomes. Seamless plan-to-plan portability is coming, but we still have a way to go before the dream becomes a reality. In the meantime, plan sponsors should continue to encourage financial wellness among participants—without undermining those efforts by automatically cashing out small balances.