In consolidated testimony before the ERISA Advisory Council on the topic of Participant Plan Transfers and Account Consolidation for the Advancement of Lifetime Plan Participation, EBRI’s Craig Copeland and Retirement Clearinghouse’s Tom Johnson presented “Auto Portability Research & Simulation: Automating Plan-to-Plan Transfers for Small Accounts” – providing the Council with the latest information & research on Auto Portability, as well as describing the present state of plan-to-plan transfers (“roll-ins”).
This video presentation is designed to give the viewer a basic understanding of Auto Portability.
What is 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.
- Serves the needs of participants subject to mandatory distribution provisions of their employer-sponsored plan (separated participants with account balances less than $5,000) to curb excessive cash out leakage occurring as participants change jobs.
- Could be adapted to larger account balances, should public policy dictate a higher mandatory distribution limit.
Why is Auto Portability needed?
In his latest article in MarketWatch, posted on New Year’s Eve, RCH President, CEO and RetireMentor Spencer Williams counsels those who switched jobs in 2016 to make their New Year’s resolutions to roll-in all of their retirement savings accounts – not just the account in their most recent prior-employer plan – into their new-employer plan.
For any account that’s not yet rolled in to a current-employer plan, Williams strongly urges that savers update their current contact details.
In his latest article in MarketWatch, RetireMentor and RCH CEO Spencer Williams gets us into the festive, holiday spirit by showcasing the “miracle” of compound interest. Compound interest is particularly relevant to retirement savers, whose nest eggs will incubate over a career.
Thus, any withdrawal of retirement savings – particularly cashouts that are made early in a career – can rob savers of thousands of dollars at retirement age. Less well-known, but still damaging, are the accounts that are left stranded and dinged every year by fees.
Williams’ two examples tell the compound interest tale. In his first example, Williams demonstrates that a 30-year old saver cashing out a $5,000 401(k) account will lose almost $52,000 in compound interest savings by age 65. In Williams’ second example, our 30-year old doesn’t cash out, but leaves his savings stranded at his previous employer, where he’ll pay an additional $2,052 in fees, which, on a compounded basis, translates to a whopping $8,488 in lost savings at age 65.
Bottom line, retirement savers should consolidate their qualified retirement savings accounts to their current employers, whenever they switch jobs.
Consolidation allows retirement savers to enjoy the gift that keeps on giving: compound interest.
This video presentation is designed to give the viewer a basic understanding of the problem of uncashed 401(k) distribution checks.
What are uncashed distribution checks, and why should I care?
Uncashed distribution checks occur when retirement plan participants fail to cash or deposit a distribution from their qualified retirement savings account, for a variety of reasons, including:
- an incorrect mailing address
- a lost or misplaced physical check
- a distribution check that was not anticipated
- as the result of inaction on the part of the participant
Uncashed distribution checks are a growing problem for plan sponsors, as the numbers of small-balance accounts and separated participants grow. For qualified plans, uncashed distribution checks can represent a fiduciary liability, since the amounts must be considered plan assets until the check is cashed or otherwise resolved. Over time, the numbers of uncashed checks can mount, along with the administrative burden and fiduciary risk.
Plans can take steps to minimize the incidence of uncashed distribution checks, as well as to resolve the situations that inevitably occur.
Why do uncashed distribution checks occur?
In his latest MarketWatch RetireMentors column, RCH CEO Spencer Williams modifies the familiar proverb “a stitch in time saves nine” for the benefit of 401(k) savers who have multiple retirement savings accounts. A roll-in becomes the equivalent of the stitch, saving participants considerable time and money as they change jobs.
As the original proverb suggests, Williams argues that savers are much better-off consolidating their balances at each job change, vs. waiting until retirement to do so.
Williams backs up his advice with plenty of facts.
The Employee Benefit Research Institute (EBRI) estimates that the average American will change jobs over seven times in a 40-year career. Using figures obtained from a study of mobile workforce behaviors, Williams calculates that waiting to perform seven roll-ins at retirement age would take between 35 and 42 weeks of effort.
To make matters worse, unconsolidated accounts lose a substantial amount in fees and compounded interest. For example, an account stranded at age 30 would lose an estimated $6,708.54 in fees and compounded interest by age 65.
Finally, applying the “time is money” theory, Williams asserts that $100 to $500 of personal time spent rolling in balances now is much better than spending $700 to $3500 at age 65.
In addition to their virtues of saving time and money, roll-ins reduce the risk of losing your savings. Savers who’ve stranded accounts with less than $5,000 may be subject to being forced out of their plan and into a safe-harbor IRA, or worse – find themselves facing an involuntary cash-out if their balance is less than $1,000.
With one in six Americans relocating in any given year, the chances of these small, stranded accounts “going missing” can skyrocket.
As Williams so aptly demonstrates, a “roll-in in time” will save you far more than nine when you’re ready to retire.
This video presentation is designed to provide qualified retirement plan sponsors with an overview of key actions that they can take in order to help reduce 401(k) plan leakage.
Why is 401(k) Plan Leakage a Problem?
401(k) leakage is a large -- and growing – problem:
- Every year, the GAO estimates that billions of dollars of retirement savings are prematurely removed from our nation’s defined contribution plans.
- Leakage studies by large recordkeepers tell a consistently grim story, including cashout levels as high as 60% at job change, depending upon the balance segment.
- EBRI estimates that, if cashout leakage were reduced by just one-half, we would add over $1.3 trillion in retirement savings in just over 10 years.
Fortunately, there are concrete, proven steps that plan sponsors can take that will not only reduce leakage, but can increase participants’ retirement readiness, streamline your plan and trim your administrative burden.
1. Recognize the big leakage problem: cashouts at job change
Plan sponsors should understand that:
- 89% of leakage comes in the form of cashouts that occur post-separation1, when job-changing Americans confront a system that makes it difficult to easily transfer their retirement savings from one plan to the next.
- This lack of portability means that cashing out is a huge temptation. Almost 2/3 of separated participants who cash out are doing so for reasons other than economic hardship2. Most participants who cash out will regret it later
- Those who don’t cash out can often leave small, stranded 401(k) balances behind.
1 - GAO, Report to the Chairman, Senate Committee on Aging, August 2009
2 - Boston Research Technologies, Actionable Insights for America’s Mobile Workforce, May 2015
So what can plan sponsors do? Let’s look first at newly-separated plan participants.
When it comes to the 401(k) plan feature known as automatic enrollment, most industry observers seem to agree that it’s a good thing. In a world of scarce resources, you can never have too much of a good thing, right?
Unfortunately, recent industry data suggests that adoption of automatic enrollment has begun to lose steam, and has not yet gained a firm footing in certain sectors.
Why? Where does the resistance to automatic enrollment come from, and what can be done to re-ignite the next era of its adoption?
As we enter the 4th quarter of 2016, many plan sponsors – for a variety of reasons – are faced with the prospect of a 401(k) plan termination. For most, this will be the first -- and only -- time that they’ll undertake this important project.
If you’re facing a plan termination in the 2016 calendar year, time is not on your side. A properly-conducted plan termination can take up to 2-3 months from start-to-finish, and requires significant planning, flawless execution and lots of attention to detail.
A poorly-executed plan termination could result in your plan not being properly terminated -- or worse -- you could be facing an audit.
To assist sponsors in understanding the basics about terminating 401(k) plans, Retirement Clearinghouse has prepared a free, three-part video series, immediately accessible via the links below:
In his most recent article in MarketWatch, RCH’s Spencer Williams notes the upcoming ‘National Save for Retirement Week’ event, and employs some clever word-association that has readers re-thinking the meaning of the word “save.”
As Williams points out, the worst decision an employee can make is not to “save” in the first place. If they’ve made the right call to participate in their employer’s qualified plan, then the word “save” can take on a whole new meaning at the point they change jobs, when they may need to be rescued from the second-worst decision: to cash out their retirement savings.
Citing a recent study by EBRI and ICI, Williams notes that consistent participation in a 401(k) plan is closely-linked to higher levels of job tenure. Thus, if plan participants can avoid cashing out at job change and roll their balances forward, they create “synthetic tenure” – the unbroken, continuous participation in a qualified plan throughout their working career.
When National Save for Retirement Week begins on October 16, remember to “save” your retirement by never cashing out and by always keeping your savings invested in a defined contribution plan.