In his September 2nd, 2015 MarketWatch article One Solution to Three Costly Retirement-Saving Mistakes, RCH’s CEO Spencer Williams provides insight as to why a majority of Americans are not very confident in their retirement readiness. Three costly mistakes consistently plague retirement savers: 1) leaving 401(k) accounts behind when changing jobs, 2) prematurely cashing out and 3) not informing prior employers’ retirement plan record-keepers about address changes.
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.
Whenever I am meeting with a plan sponsor, TPA or recordkeeper for the first time, I ask about returned mail related to missing participants; and almost every time I get…“the look”. The look and/or eye roll that instantly says that returned mail is definitely a problem. The entire retirement industry is all-too-familiar with returned mail related to missing participants. In addition to the money wasted on materials and mailing costs, missing participants create administrative burdens and increase the plan’s fiduciary liability risk. So, what’s a fiduciary to do?
The Case for Automatically Moving Mandatory Distributions Forward
The mandatory distribution-to-Safe Harbor IRA plan feature as commonly utilized today was conceived in 2001 and launched in 2005 with good intentions, and for valid reasons. A mobile workforce, combined with a lack of retirement savings portability, had created a burgeoning problem for plan sponsors: an explosion of small-balance (less than $5,000) accounts left “stranded” in-plan, resulting in rampant cashouts, missing participants, uncashed distribution checks and the like. These problems only accelerated with the widespread adoption of auto enrollment, beginning in 2009.
“Make the smart decision the easiest decision.”
This seems like an obvious goal for plan sponsors when designing participant directed retirement plans, and it’s certainly driven the rapid adoption of the autos – auto enrollment, auto deferral escalation and auto pilot investment options, such as target date funds.
Plan sponsors can help themselves and their participants over the long term by rolling balances of $5,000 or less from inactive participants into safe harbor IRAs. However, for various reasons discussed below, many safe harbor IRAs don’t live up to their name and could leave sponsors with unexpected fiduciary liability.