When the Auto Portability Simulation (APS) model was recently unveiled at EBRI’s 78th Policy Forum, a lot of attention was paid to the “marquee” numbers, and rightly so. I’m referring here to the $154 billion reduction in cashout leakage, as well as the $115 billion increase in plan-to-plan roll-ins that occur under the adoption of Auto Portability.
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savings as a bucket of water, “leakage” refers to those retirement savings that, like water in a leaky bucket, are withdrawn from the U.S. retirement system every year.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%.
On May 12th, Retirement Clearinghouse President & CEOJ. Spencer Williams unveiled theAuto Portability Simulation(APS) at theEmployee Benefit Research Institute's 78th Policy Forum. The APS was developed by Retirement Clearinghouse in conjunction with Dr. Ricki Ingalls, Chair of Computer Information Systems at Texas State University, and Principal at Diamond Head Associates, Inc.
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.
In virtually any area of specialty, a unique jargon evolves that’s highly-specific to that field. To insiders using the lingo every day, it seems familiar and perfectly normal. To outside observers, it can feel like a foreign language -- with words, terms and acronyms that make no sense.
Automatic rollover programs allow plan sponsors to force out of their plan separated participants with balances less than $5,000 into a Safe Harbor IRA. These programs can be quite effective at helping sponsors resolve many of the problems associated with housing small-balance accounts in-plan, such as:
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.
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 previous articles, we’ve discussed the many benefits that occur when participants roll in multiple retirement savings accounts into their current employer’s 401(k) account. Participants benefit from reduced cash outs, lower investment fees and simplified retirement planning. A program of facilitated roll-ins delivers positive results for plans as well, including increased average balances, lower recordkeeping costs and improved retirement readiness metrics.
In his 1/20/16 MarketWatch column (Four New Year’s Resolutions for Retirement Savers), Retirement Clearinghouse CEO Spencer Williams offers four New Year’s resolutions that all 2016 job-changers should take to heart, including: