Five Misconceptions About Automatic Rollovers

Most agree – automatic rollover programs can help plan sponsors deal with problems associated with small-balance accounts, including:

• ​High levels of missing participants
• Increased administrative costs and workload
• Increased recordkeeping fees
• Lower average account balances

​​Still, misconceptions persist about automatic rollovers.

In the video below, we present five of the most important misconceptions about automatic rollovers that plan sponsors should be aware of.

Misconception #1: It’s best to cash out participants with balances <$1,000
No way. This can produce large numbers of uncashed checks:

• All distribution checks remain a plan asset until cashed.
• The largest single source of uncashed distribution checks is from automatic cash outs of balances <$1,000.

A better approach:  Avoid uncashed checks by automatically rolling over balances less than $1,000.  Select an automatic rollover provider who accepts balances less than $1,000 into a safe harbor IRA.

Misconception #2: Cashout rates don’t matter for small-balance accounts.
Au contraire. Small-balance cashouts have a huge impact:

• Sub-$5,000 balances represent 28.5% of defined contribution participants, and over 5 million annual job-changing participants.
• A 30-year-old cashing out $1,679 nets $1,175. Had they avoided cashing out, they’d end up with $17,926 at retirement.
• EBRI estimates that plugging leakage for balances under $5,000 has present value benefits of $1.5 trillion, system wide.

A better approach:  Improve the odds through education & assistance. Select an automatic rollover provider who discourages cashouts by illustrating the high cost of cashing out, and by assisting participants in consolidating their retirement savings.

Misconception #3: Participants “take charge” of savings in safe harbor IRAs
Nope. A vanishingly small percentage actually will.

• <1% of all safe harbor IRA accountholders will take control and move out of the default investment.
• Despite this, plan sponsors will sometimes agonize over investment options & brokerage features available to safe harbor IRA accountholders.

A better approach: Focus on moving safe harbor IRA balances forward.  Select an automatic rollover provider with a solid commitment to moving balances forward.  9 of 10 participants say portability is valuable to them (source: EBRI 2021 Retirement Confidence Survey).

Misconception #4: Miscellaneous automatic rollover fees aren’t important.
Sadly, “miscellaneous” fees can quickly devastate small balances.

• In addition to annual fees and distribution fees, some automatic rollover providers charge:
  - Setup fees of up to 20% of the initial balance
  -Account closure fees
  -Search fees
  -Paper statement fees
  -Escheatment fees
  -….and more, including 275bps default investment fund fees
• After two years in a safe harbor IRA, these fees can add up to over $800! Yikes!!

A better approach: Request, in writing, a complete list of all fees.

Misconception #5: A “bundled” automatic rollover service is the best option.
Not always. An automatic rollover service “bundled” by your TPA or recordkeeper may:

• Refuse to accept balances less than $1,000.
• Have extraordinarily high levels of cashouts.
• Pay referral fees to third parties and make these up with miscellaneous fees on your former participants.
• Not support portability and consolidation, and even erect barriers to exit (ex. – signature guarantees).

A better approach:  Don’t be limited by “bundled” choices. Select the most fiduciary-friendly automatic rollover option – one that applies an enhanced standard of care for participants.