Dressing Up Traditional Automatic Rollovers

Recently, we’ve read – mainly via paid promotions – about the existence of so-called “world-class” automatic rollover IRA services, which seem to be little more than old-school, traditional automatic rollover IRAs laying claim to unspecified, premium features.

When it comes to “traditional” automatic rollover IRAs, you can dress them up, make them up or try to cover up their flaws, but they wind up housing former participants in high-fee safe harbor IRA “landfills” where their small balances languish.

No, what’s needed is not faux fancy features – it’s a low-fee, transitional safe harbor IRA that preserves small-balance retirement savings for only as long as they can be consolidated into a current-employer’s plan or into another IRA.

It’s All About the Participants
While it is true that traditional automatic rollovers have unquestionably helped plans mitigate a portion of their cost and risk, it’s also true that they have negatively impacted many participants’ ability to properly save for retirement.

For every 1000 participants who are subject to a traditional automatic rollover process:

• 550, or 55% will quickly choose the easiest option, which is to cash out completely. No education is provided to discourage cashouts and no assistance is offered to help them move their retirement savings forward.
• 60, or 6% will proactively move their funds to another IRA or to a new employer’s plan.
• 390, or 39% are automatically rolled over to a safe harbor IRA, with their balances invested in a money market fund.
• When the 390 “survivors” do bother to act, each year 6-12% of them will continue to cash out or will eventually allow fees to erode their balance to zero.
• Only 4, or 1% of these new safe harbor IRA accountholders will bother to move their balances out of the default investment fund.

For what they lack in participant outcomes, traditional automatic rollover IRAs truly excel at imposing onerous fees.

A scan of the internet reveals traditional automatic rollover IRA program fees that include:

• Initial setup fees, of up to 20% of the initial balance
• Asset management fees of up to 2.75% per annum on in-house default investment funds, often hidden behind a low crediting rate on a bank deposit vehicle
• Annual maintenance fees paid up front
• Use of prepaid debit cards for distribution payments
• Account closure fees in addition to distribution fees
• Recurring search fees, if an accountholder is deemed missing (over $100 per search)
• Paper statement fees (up to $15 per mailing)
• Escheatment fees ($125 per account)
• Residual dividend distribution fees
• Check reissuance fees
• Roth conversion fees
• Federal Thrift Savings Plan rollover fees

To add final insult to injury, liberating what remains of the funds can become a costly hassle, as some traditional automatic rollover IRA providers require a medallion signature guarantee, which can cost around $50, assuming the accountholder can get one.

A New Paradigm
It is precisely these dismal outcomes and burdensome fee structures that inspired a new paradigm for automatic rollover IRAs.

Properly structured, an automatic rollover IRA should be self-limiting – providing a low-cost, short-lived transitional account for small-balance, job-changing participants that will 1) preserve their retirement savings and 2) through auto portability, quickly and easily facilitate consolidation of their modest balances into a current-employer’s active plan or into an existing IRA.

Key features to look for in a participant-friendly automatic rollover IRA program include:

• During the pre-rollover “force out” phase, participants are offered one-on-one education about the high cost of cashing out and provided expert assistance in consolidating their balances
• Participants whose balances are forced out into safe harbor IRAs are offered the same ongoing education and assistance
• Support for auto portability is incorporated into the automatic rollover program
• Metrics on cashouts, account consolidations and average duration of safe harbor IRAs are tracked and reported, and are compared vs. industry averages

For more information on how to evaluate and select an automatic rollover IRA provider, download this checklist.

Looking Under the Hood
When it comes to automatic rollover IRAs, don’t fall for a solution that exposes participants to excessive cashout leakage, unreasonable fees and barriers to exit. All it takes is a good look under the hood.