In consolidated testimony before the ERISA Advisory Council on the topic of Participant Plan Transfers and Account Consolidation for the Advancement of Lifetime Plan Participation, EBRI’s Craig Copeland and Retirement Clearinghouse’s Tom Johnson presented “Auto Portability Research & Simulation: Automating Plan-to-Plan Transfers for Small Accounts” – providing the Council with the latest information & research on Auto Portability, as well as describing the present state of plan-to-plan transfers (“roll-ins”).
This video presentation is designed to give the viewer a basic understanding of Auto Portability.
What is Auto Portability?
Auto Portability is:
- The routine, standardized and automated movement of an inactive participant’s retirement account from a former employer’s retirement plan to their active account in a new employer’s plan.
- Serves the needs of participants subject to mandatory distribution provisions of their employer-sponsored plan (separated participants with account balances less than $5,000) to curb excessive cash out leakage occurring as participants change jobs.
- Could be adapted to larger account balances, should public policy dictate a higher mandatory distribution limit.
Why is Auto Portability needed?
Entitled “DConversations – Automatic Portability: A New Approach to Addressing Retirement Plan Leakage” – the research includes:
- Video and transcript of LIMRA’s 2016 Retirement Industry Conference, where Auto Portability was a featured topic, and where LIMRA’s Matthew Drinkwater served as topic moderator.
- The video and transcript require a LIMRA login (employees of LIMRA members can click here for a complimentary LIMRA account), while 5 individual video segments are available to the general public.
- Informative infographics that address:
In his latest article in MarketWatch, posted on New Year’s Eve, RCH President, CEO and RetireMentor Spencer Williams counsels those who switched jobs in 2016 to make their New Year’s resolutions to roll-in all of their retirement savings accounts – not just the account in their most recent prior-employer plan – into their new-employer plan.
For any account that’s not yet rolled in to a current-employer plan, Williams strongly urges that savers update their current contact details.
As 2016 draws to a close, most observers will reflect upon the events that have dominated retirement industry news coverage: the Fiduciary Rule, the 10-year anniversary of the Pension Protection Act, and the Presidential election. These events will clearly shape plan sponsors’ activities and priorities for the New Year.
Less publicized, but perhaps more impactful are the recommendations provided in November, 2016 by the ERISA Advisory Council (EAC) on “Participant Plan-to-Plan Transfers and Account Consolidation for the Advancement of Lifetime Plan Participation” – released following three years of expert testimony.
Plan sponsors would be well-served by reviewing the EAC’s Executive Summary and working the message of lifetime plan participation into their participant communications and retirement plan initiatives.
A good place to start is to encourage and facilitate plan-to-plan transfers, known as “roll-ins.”
In his latest article in MarketWatch, RetireMentor and RCH CEO Spencer Williams gets us into the festive, holiday spirit by showcasing the “miracle” of compound interest. Compound interest is particularly relevant to retirement savers, whose nest eggs will incubate over a career.
Thus, any withdrawal of retirement savings – particularly cashouts that are made early in a career – can rob savers of thousands of dollars at retirement age. Less well-known, but still damaging, are the accounts that are left stranded and dinged every year by fees.
Williams’ two examples tell the compound interest tale. In his first example, Williams demonstrates that a 30-year old saver cashing out a $5,000 401(k) account will lose almost $52,000 in compound interest savings by age 65. In Williams’ second example, our 30-year old doesn’t cash out, but leaves his savings stranded at his previous employer, where he’ll pay an additional $2,052 in fees, which, on a compounded basis, translates to a whopping $8,488 in lost savings at age 65.
Bottom line, retirement savers should consolidate their qualified retirement savings accounts to their current employers, whenever they switch jobs.
Consolidation allows retirement savers to enjoy the gift that keeps on giving: compound interest.
This video presentation is designed to give the viewer a basic understanding of the problem of uncashed 401(k) distribution checks.
What are uncashed distribution checks, and why should I care?
Uncashed distribution checks occur when retirement plan participants fail to cash or deposit a distribution from their qualified retirement savings account, for a variety of reasons, including:
- an incorrect mailing address
- a lost or misplaced physical check
- a distribution check that was not anticipated
- as the result of inaction on the part of the participant
Uncashed distribution checks are a growing problem for plan sponsors, as the numbers of small-balance accounts and separated participants grow. For qualified plans, uncashed distribution checks can represent a fiduciary liability, since the amounts must be considered plan assets until the check is cashed or otherwise resolved. Over time, the numbers of uncashed checks can mount, along with the administrative burden and fiduciary risk.
Plans can take steps to minimize the incidence of uncashed distribution checks, as well as to resolve the situations that inevitably occur.
Why do uncashed distribution checks occur?
In his latest MarketWatch RetireMentors column, RCH CEO Spencer Williams modifies the familiar proverb “a stitch in time saves nine” for the benefit of 401(k) savers who have multiple retirement savings accounts. A roll-in becomes the equivalent of the stitch, saving participants considerable time and money as they change jobs.
As the original proverb suggests, Williams argues that savers are much better-off consolidating their balances at each job change, vs. waiting until retirement to do so.
Williams backs up his advice with plenty of facts.
The Employee Benefit Research Institute (EBRI) estimates that the average American will change jobs over seven times in a 40-year career. Using figures obtained from a study of mobile workforce behaviors, Williams calculates that waiting to perform seven roll-ins at retirement age would take between 35 and 42 weeks of effort.
To make matters worse, unconsolidated accounts lose a substantial amount in fees and compounded interest. For example, an account stranded at age 30 would lose an estimated $6,708.54 in fees and compounded interest by age 65.
Finally, applying the “time is money” theory, Williams asserts that $100 to $500 of personal time spent rolling in balances now is much better than spending $700 to $3500 at age 65.
In addition to their virtues of saving time and money, roll-ins reduce the risk of losing your savings. Savers who’ve stranded accounts with less than $5,000 may be subject to being forced out of their plan and into a safe-harbor IRA, or worse – find themselves facing an involuntary cash-out if their balance is less than $1,000.
With one in six Americans relocating in any given year, the chances of these small, stranded accounts “going missing” can skyrocket.
As Williams so aptly demonstrates, a “roll-in in time” will save you far more than nine when you’re ready to retire.
This video presentation is designed to provide qualified retirement plan sponsors with an overview of key actions that they can take in order to help reduce 401(k) plan leakage.
Why is 401(k) Plan Leakage a Problem?
401(k) leakage is a large -- and growing – problem:
- Every year, the GAO estimates that billions of dollars of retirement savings are prematurely removed from our nation’s defined contribution plans.
- Leakage studies by large recordkeepers tell a consistently grim story, including cashout levels as high as 60% at job change, depending upon the balance segment.
- EBRI estimates that, if cashout leakage were reduced by just one-half, we would add over $1.3 trillion in retirement savings in just over 10 years.
Fortunately, there are concrete, proven steps that plan sponsors can take that will not only reduce leakage, but can increase participants’ retirement readiness, streamline your plan and trim your administrative burden.
1. Recognize the big leakage problem: cashouts at job change
Plan sponsors should understand that:
- 89% of leakage comes in the form of cashouts that occur post-separation1, when job-changing Americans confront a system that makes it difficult to easily transfer their retirement savings from one plan to the next.
- This lack of portability means that cashing out is a huge temptation. Almost 2/3 of separated participants who cash out are doing so for reasons other than economic hardship2. Most participants who cash out will regret it later
- Those who don’t cash out can often leave small, stranded 401(k) balances behind.
1 - GAO, Report to the Chairman, Senate Committee on Aging, August 2009
2 - Boston Research Technologies, Actionable Insights for America’s Mobile Workforce, May 2015
So what can plan sponsors do? Let’s look first at newly-separated plan participants.
When it comes to the 401(k) plan feature known as automatic enrollment, most industry observers seem to agree that it’s a good thing. In a world of scarce resources, you can never have too much of a good thing, right?
Unfortunately, recent industry data suggests that adoption of automatic enrollment has begun to lose steam, and has not yet gained a firm footing in certain sectors.
Why? Where does the resistance to automatic enrollment come from, and what can be done to re-ignite the next era of its adoption?