“Make the smart decision the easiest decision.”
This seems like an obvious goal for plan sponsors when designing participant directed retirement plans, and it’s certainly driven the rapid adoption of the autos – auto enrollment, auto deferral escalation and auto pilot investment options, such as target date funds.
Consolidation Corner Blog
Consolidation Corner is the Retirement Clearinghouse (RCH) blog, and features the latest articles and bylines from our executives, addressing important retirement savings portability topics.
“Make the smart decision the easiest decision.”
Today, it’s a commonly-accepted practice for plan sponsors to focus on three major initiatives in order to promote retirement adequacy: participation, saving and diversification. While these concepts are proven, the emerging best practice is to incorporate the principle of consolidation, so that plan sponsors will begin to focus on participation, consolidation, saving and diversification.
Plan sponsors can help themselves and their participants over the long term by rolling balances of $5,000 or less from inactive participants into safe harbor IRAs. However, for various reasons discussed below, many safe harbor IRAs don’t live up to their name and could leave sponsors with unexpected fiduciary liability.
Mandatory distributions from employer-sponsored plans are a creation of regulation—specifically, a section of ERISA that allows plan sponsors to distribute accounts with less than $5,000 out of a qualified plan and into a safe harbor IRA. If plan sponsors follow the rules, they are protected from legal recourse, and the rules are simple: act in a fiduciary manner when choosing a provider for their program. However, that word—“fiduciary”—is often hard to define and can be interpreted in many ways, so it begs the question: “How does a sponsor best fulfill that responsibility in the context of a mandatory distribution program?”
How Job Changing Impacts Retirement Savings
In conjunction with Boston Research Technologies, RCH announced the findings of a groundbreaking research study on America’s mobile workforce, providing insights into participant behaviors regarding retirement savings portability. The study offers plan sponsors with strategies to stem cashouts and to improve retirement outcomes. On May 28th, RCH and Boston Research Technologies teamed with PLANSPONSOR to deliver a webcast, where attendees were presented the study’s key findings, implications and action items.
The Pension Protection Act of 2006 created a safe harbor for retirement plan sponsors to automatically enroll employees in their plans. This provision was designed to help plan sponsors and participants over the long term, and it has—but it also unintentionally fueled a surge in small accounts, hurting both constituencies.
Retirement plan sponsors can reap significant rewards from the automated, two-way flow of retirement savings accounts into and out of plans. This “automated portability” spawns important downstream benefits for sponsors—but sponsors can only capture them by choosing to recycle mandatory distributions rather than continuing to dump them into an already sizable landfill of micro-balance safe harbor IRAs (see Employee Benefit News previous blog post titled Why Dump Mandatory Distributions In A Landfill When You Can Recycle?). This article focuses on one of those benefits—the decrease in plan costs obtained through the increase in a plan’s average account balance.
In her 4/8/15 MarketWatch article, Alicia Munnell -- Boston College's Director, Center for Retirement Research -- comes down squarely in favor of a clearinghouse for the nation's 401(k) system, solving the dual problems of forced transfers (less than $5,000) and multiple retirement savings accounts. Ms. Munnell cites the efforts of RCH in developing workable solutions, as well as the progress made by Spencer Williams and Tom Johnson in advancing awareness and influencing public policy.
Mandatory distributions of small 401(k) accounts when participants separate from service provide many benefits for plan sponsors, including lower administrative costs and higher average account balances. However, these “automatic rollovers” also indirectly cause billions of dollars to leak out of the U.S. retirement system every year through cash-outs.
Have you ever tried to fix a leaky kitchen faucet yourself? If so, the task probably seemed simple at the outset. However, if you’re not an experienced plumber, you may have inadvertently compounded the small problem of a leak — perhaps by over-tightening a nut, pinching the washer, stripping the threads, or worst of all, splitting the pipe — and unintentionally made the situation worse, as well as expensive to fix.