When Ben Franklin coined the adage “an ounce of prevention is worth a pound of cure” he wasn’t considering the problem of missing participants, but 401(k) plan sponsors would be wise to heed Ben’s sage advice.
Today, plan sponsors face an explosion of missing participants, driven by the ongoing adoption of auto enrollment and increasing workforce mobility. Their problems are further compounded by the administrative burden required to locate them, combined with a regulatory minefield that offers little guidance and is prone to taking inconsistent enforcement actions.
With incomplete guidance from regulatory authorities, most plan sponsors react to the missing participant problem by implementing various address location search services. While this approach can alleviate some of the symptoms caused by missing participants, they are band-aid solutions that do little to address the underlying problem.
Research Points the Way to Consolidation
In March 2018, Retirement Clearinghouse (RCH) and Boston Research Technologies (BRT) published key findings from a survey that examined the retirement industry’s missing participant problem. The research revealed the key demographic trends and participant behaviors that result in missing participant accounts, and clearly indicated that the problem will grow worse as:
- Participants change jobs at higher rates
- Terminated participants eventually relocate, but neglect to update their contact information
- More Millennials -- already the largest source of missing participant accounts -- move forward in their careers
Unfortunately, while existing “best practices” to deal with missing participants can alleviate some pain, they often don’t do enough and can have negative side effects as well:
- Even the best address location search practices will produce transient results, as participants continue to terminate, to relocate and to have their contact information grow stale, again and again.
- Automatically cashing out balances less than $1,000 can remove the smallest accounts, but will create downstream headaches for plan sponsors with uncashed distribution checks.
- Traditional automatic rollover programs that force out participants with less than $5,000 deliver sub-optimal results for participants, producing high levels of cashouts, low savings yields and ironically, lost retirement savings that languish in safe harbor IRAs.
The only proven way to effectively manage the missing participant problem is to attack the source of the stale address – the accounts left behind by terminated participants. Eliminating these accounts through a program of consolidation removes redundant fees that participants are paying, and avoids the proliferation of stale address records.
If the consolidation occurs into the participant’s active plan account, our research further demonstrated that those records can be extremely reliable – with a 92% probability that any record will have a current address.
The “Ins and Outs” of Consolidation
To truly be effective in addressing missing participants, a program of account consolidation should address consolidation both into, and out of 401(k) plans.
- Consolidation Into Plan
Reaching out to recent hires newly-eligible to participate and encouraging consolidation of retirement savings into the plan from prior-employers is a good place to start. However, do-it-yourself roll-ins can be difficult for participants, as this DIY roll-in flowchart illustrates.
Consider adding an unbiased, objective facilitated roll-in service to help participants with the roll-in transaction. A facilitated roll-in program will have a positive impact on your plan, and it will be a popular benefit to add.
- Consolidation Out of Plan
For terminated participants whose accounts are greater than $5,000 and not subject to mandatory distributions, plan sponsors can offer a facilitated roll-out program to help these participants understand their options, avoid cashouts and move their balances to their new-employer’s plan. These services can be offered at no cost to the plan sponsor.
For terminated participants subject to mandatory distributions, select an automatic rollover program that conforms to the principles of auto portability, increasing the odds that their retirement savings will be preserved and moved forward.
The results that can be achieved by a program of consolidation are best illustrated in earlier research by BRT in 2013 – Eliminating Friction and Leaks in America’s Defined Contribution System. In that study, a mega plan sponsor in the healthcare industry dramatically reduced the incidence of ‘stranded’ accounts with a comprehensive program of consolidation, in conjunction with a measured approach to verifying terminated participants’ addresses.
RCH has long argued that consolidation belongs at the top of the plan sponsor initiative list for its financial wellness benefits to participants. Now, the elimination of missing participant accounts may be the strongest argument for plan sponsors to move forward with a consolidation initiative.