Meanwhile, as a practical matter, fiduciaries of ongoing plans must still confront the problem of locating missing participants, and must do so with incomplete guidance. If audited, they’ll potentially face “ad hoc” enforcement positions by the DOL, which the Council asserts have been inconsistent and, in many cases, unreasonable.
This article focuses on the Council’s specific recommendations to the DOL as set forth in their letter. The Council’s recommendations, if adopted, could establish a more complete, consistent and reasonable framework for plans to address the missing participant problem, going forward.
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.
Today, it’s commonly-accepted practice for retirement plan sponsors to focus on three major initiatives to promote retirement adequacy: participation, saving and diversification.
While these three initiatives are proven, an emerging best practice is for plan sponsors to expand this list, incorporating consolidation, where plan participants are encouraged to consolidate balances from former employers’ plans, using their current-employer’s plan to manage their retirement savings.
The American worker is highly-mobile, changing jobs over seven times in a career, and relocating once every 7 years. At the same time, participation in plans has increased substantially, primarily due to auto enrollment.
It’s generally accepted that the small-balance accounts of terminated 401(k) plan participants have been a problem for plan sponsors, resulting in increased plan costs, fiduciary risk and other ancillary problems, such as missing participants and uncashed distribution checks.
Now, based on new information from EBRI and other sources, we’re learning that small accounts are a large and growing problem for active participants as well.
If no action is taken to make retirement savings more portable, an increasingly mobile workforce will ensure that this collective “explosion” in small accounts will exacerbate headaches for plan sponsors. For participants with small accounts, research indicates that bad outcomes will only worsen as they leave savings behind or cash out entirely.
Looking Back: The Impact of Public Policy on Small Accounts
The problem of small accounts -- for both terminated and active participants – didn’t happen overnight, and has been influenced over many years by public policy, resulting in a decidedly mixed bag of outcomes.
It’s become widely-accepted that retirement savings portability is proven to address the small account problem for 401(k) plan sponsors, as well as preserve participants’ savings currently lost to cashout leakage.
However, the concept of retirement savings portability is relatively new. At year’s end, most plan sponsors’ attention will be focused on other plan design issues, such as auto enrollment/escalation, the lineup of investment options, enrollment, education, retirement income solutions and so forth.
Sadly, many sponsors could miss an important opportunity to make some straightforward changes to enhance portability that can significantly improve participants’ financial wellness, reduce plan expenses and minimize fiduciary liability.
As the end of 2017 approaches, here are five actions that a plan sponsor could take to facilitate retirement savings portability and significantly improve their plans in 2018.
In January 2016, this blog published a post on the November 2015 letter from Senator Patty Murray (D–WA) of the Senate HELP committee, signed by a bicameral group of Congressional members, urging then Department of Labor (DOL) Secretary Thomas Perez to encourage the DOL’s Employee Benefits Security Administration to issue guidance on auto portability.
To demonstrate the bipartisan resolve to plug cash out leakage in the retirement system through auto portability, Senator Tim Scott (R-SC) published a similar letter this week, sent to current Labor Secretary Alexander Acosta, and co-signed by 10 Republican Senators, urging similar guidance on auto portability.
Auto Portability is the routine, standardized and automated movement of an inactive participant’s retirement account from a former employer’s retirement plan to their active account in a new employer’s plan. By dramatically reducing cashouts and improving retirement readiness, Auto Portability will deliver broad benefits to America’s defined contribution system, its participants and to the entire American economy.
But who benefits from Auto Portability, and how?
America’s Mobile Workforce
The ultimate beneficiary of Auto Portability is America’s mobile workforce – the qualified plan participants whose retirement savings are preserved.
In 1989, New York real estate developer Seymour Durst wanted to highlight America’s rising national debt, and came up with an idea: the National Debt Clock. Since then, the National Debt Clock has had a physical presence as a billboard near Times Square, serving as a constant reminder to Americans of their government’s ever-growing debt.
As of May 12th, the clock indicates that total cash out leakage for 2017 has reached $24.4 billion. If no action is taken to stem this outflow of funds, cash out leakage will eventually reach $68 billion by year’s end.
Please visit here for the full agenda. To register, please visit here.
The 80th EBRI-ERF Policy Forum’s theme is “Retirement Policy Directions in 2017 and Beyond” and takes on critical retirement policy issues, moderated by an all-star lineup of speakers, including:
Retirement Plan Portability & Public Policy (Jack VanDerhei, EBRI Research Director and Spencer Williams, Retirement Clearinghouse President & CEO)
The Lillywhite Award (Olivia S. Mitchell, Economist and International Foundation of Employee Benefit Plans Professor at The Wharton School)
What’s Enough? A Conceptual and Empirical Investigation of Retirement Adequacy (Peter J. Brady, Senior Economist, Retirement and Investor Research Division, Investment Company Institute)
Fixing the Saver’s Credit and Other Ways to Help At-Risk Workers (Catherine Collison, President, Transamerica Institute and Transamerica Center for Retirement Studies)
EBRI Research – Update (Jack VanDerhei, EBRI Research Director, Craig Copeland, Senior Research Associate and Sudipto Banerjee, Research Associate)
Whether you’re an EBRI sponsor, congressional or executive branch staff, a benefits expert, a representative from academia, or affiliated with an interest group, the Policy Forum is an ideal opportunity to examine public policy issues, supported by the latest in EBRI research.
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