In the wake of the Fiduciary Rule, providers of all stripes are broadly reevaluating their strategies for the participant and asset retention that is essential to growing their retirement plan businesses. Over the past two decades, providers have primarily looked to capture IRA rollovers as a means to grow retirement assets. The Department of Labor’s new Fiduciary Rule creates challenges to that model. However, there is another, largely untapped, pool of assets within providers’ reach that can fuel growth—premature cash-outs. Auto portability, and portability solutions in general, represent a new and unique way to tap that potential source of growth.
Consolidation Corner Blog
Consolidation Corner is the Retirement Clearinghouse (RCH) blog, and features the latest articles and bylines from our executives, addressing important retirement savings portability topics.
First, let’s review the definition of “leakage.” If we think of total 401(k) savings as a bucket of water, “leakage” refers to those retirement savings that, like water in a leaky bucket, are withdrawn from the U.S. retirement system every year. There are three holes in the bucket: cash-outs at the point of job change, hardship withdrawals, and loan defaults. According to the U.S. Government Accountability Office, one of these holes is much bigger than the other two combined—nearly 89% of all leakage is attributed to cash-outs that occur when a participant changes jobs. Hardship withdrawals and loan defaults together account for the remaining 11%.
The Department of Labor’s much-anticipated Fiduciary Rule is ushering in many changes across the retirement services landscape, and the new rules governing the “what, how and why” for advice at the time of a participant’s job change will undoubtedly transform the rollover-to-IRA market. However, a closer reading of the Fiduciary Rule sends a clear, if unstated, signal to plan sponsors, financial advisors and record-keepers—absent a compelling reason to roll over to an IRA, keep participants invested in a qualified defined contribution plan throughout their working lives.
As we observe the 46th annual Earth Day this April 22nd, we appreciate the awareness that this event has brought to the need to protect our environment, the urgency that it’s instilled in all of us, and the tangible results that have been achieved in so many important areas. Although we have much work to do, we’ve clearly come a long way since the “throwaway” culture that emerged following World War II.
As has happened so many times before, the Baby Boomer generation is once again drawing attention to an unmet need: a seamless way to consolidate their collection of retirement accounts into a single account, which is a necessary step to creating a sturdy retirement plan. Much has been written about how sponsors can improve both their plans’ overall health and their participants’ retirement outcomes by embracing roll-ins; nonetheless, the account-consolidation process remains time-consuming and expensive for most participants.
Any day now, the Department of Labor will issue the final version of the long-awaited “Fiduciary Rule” which will redefine the term “fiduciary” under ERISA. Much has been written about the impact on advisors and broker-dealers, given their service models to retirement plans.
In his March 3rd column in MarketWatch, RCH President & CEO Spencer Williams establishes an important link between the board games we played as children (ex. – Candy Land, Trivial Pursuit and Snakes & Ladders) and the “games” we can play in adulthood, while managing our retirement savings. The children’s games are harmless, fun and instructive, but the adult retirement games (ex. – Cashing Out, Stranding Accounts, and Not Updating Your Address) are anything but.
In a previous post, Tales from the Roll-In Front Lines, Part I, we described a roll-in transaction gone awry: a comedy of errors that occurs all too often when service providers are unfamiliar with consolidating retirement savings from one plan into another.