On October 2nd, 2017, the American Benefits Council delivered a letter to the Department of Labor (DoL), urging the DoL to act on the problem of unresponsive or missing participants, an issue that has proven to be a significant point-of-pain for plan sponsors.
The central focus of the Council’s letter is the need for comprehensive and consistent guidance for plan sponsors in locating missing participants, a critical process that’s necessary to satisfy the DoL’s goal of ensuring that all participants receive their retirement benefits.
In seeking clarity and consistency, the Council seems to have hit their mark, laying out a series of recommendations for an adaptive framework, based on the lifecycle of terminated, vested employees that includes the periods before, just prior to, and following distribution events.
If adopted, the recommendations would supply desperately needed direction to fiduciaries of ongoing retirement plans, as well as providing a predictable framework for the DoL’s enforcement actions.
What’s Missing: A Strategic Solution for Missing Participants
As importantly, a careful read of the letter indicates the Council also grasps the larger dynamics of the missing participant problem, correctly identifying its underlying root causes.
In the Council’s letter is a simple, yet stunningly profound statement that, if acted upon, would serve to greatly minimize the overall incidence of missing participants in defined contribution plans:
“Because of changing workforce demographics and the rise of automatic enrollment, an employer’s responsibility for dealing with retirement benefits and accounts left behind by former employees has become even more demanding. During career transitions, employees often do not consider how their immediate change in employment will affect their long-term retirement goals. Many employees do not roll over a benefit under a former employer’s plan into their new employer’s plan. And, many workers neglect to update their contact information on file with a former employer, even if they have a defined benefit plan benefit or defined contribution plan account.”
Put simply, the missing participant problem occurs because the American worker is highly-mobile, but their defined contribution balances are not. Consequently, too many will strand their retirement savings balances, leaving their former employers holding the bag.
As the Council’s letter suggests, the missing participant problem has accelerated as participation in 401(k) plans has expanded, through features such as automatic enrollment. Automatic enrollment has not only increased cashout leakage, but has resulted in an explosion of small accounts, and for many industries with high turnover (ex. – retail), this negative outcome has curtailed further adoption of the otherwise highly-beneficial feature.
Meanwhile, at career transition, most participants receive little in the way of education or assistance in moving their retirement savings forward, and are confronted with a daunting “do-it-yourself” approach to consolidating their account balances. Consequently, most small-balance terminated participants cash out or leave their savings stranded, swelling the ranks of missing participants and spawning the systemic issue that sponsors face today.
The Missing Link: Portability of Retirement Savings
It doesn’t have to be this way. What’s really “missing” in our defined contribution system is retirement savings portability.
In 2013, a study by Boston Research Group found that cashouts could be reduced by over 50% and stranded accounts could be dramatically decreased, simply by providing participants with access to portability services. In 2015, a follow-on, comprehensive survey of America’s Mobile Workforce revealed that participants highly-valued portability assistance and would utilize these services, if offered.
But perhaps most importantly, auto portability has now emerged as a viable means to address the small account problem, and in so doing, minimize the burden of missing participants.
Auto portability enjoys bipartisan political support from both Democratic and Republican lawmakers, and has the endorsement of influential groups including the American Benefits Council, U.S. Chamber of Commerce, Insured Retirement Institute, Financial Services Roundtable, American Retirement Association, Investment Company Institute, and the Securities Industry and Financial Markets Association. Finally, the Employee Benefit Research Institute (EBRI) has estimated that full auto portability for small accounts would result in $1.5 trillion in retained savings in the retirement system, in today’s dollars.
Similar to missing participants, auto portability is awaiting guidance from the DoL that would provide safe harbor to plan sponsors who automatically roll-in balances from participants’ prior plans.
Working in tandem with the Council’s recommendations on missing participants, auto portability could deliver the proverbial “ounce of prevention” that avoids the “pound of cure” for plan sponsors, while preserving the retirement savings of millions of defined contribution plan participants.