Consolidation Corner

The Stealth Solution to America’s Retirement Savings Crisis

Posted by Neal Ringquist on Mar 14, 2017 8:30:00 AM

 

Over the past year, the Department of Labor’s Fiduciary Rule has been highly-visible, presenting major ramifications for the retirement industry and looming large on the radar screens of retirement services providers.  

 

The underlying rationale for the rule, as stated by the Obama administration in an April 6, 2016 press briefing, was to save retirement investors $17 billion per year in lost retirement savings that result from conflicts of interest in retirement advice. Certainly, anything that protects $17 billion in retirement savings is a worthy goal, if it helps more Americans meet their retirement income needs.

 

However, there’s a larger hole in our retirement system – cash-out leakage – that inflicts far greater harm to American retirement savers, yet this threat continues to fly beneath our collective radar.   

 

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Topics: Auto Portability, Mandatory Distributions, Automatic Rollovers, 401(k) Consolidation, Cash Outs, Auto Enrollment, Automatic Rollover

Incubate Small Retirement Accounts, Don’t Throw Them Away

Posted by Neal Ringquist on Feb 16, 2017 11:30:00 AM

 

On February 3rd, the U.S. Chamber of Commerce, the world’s largest business federation representing the interests of more than 3 million businesses, released Securing America’s Retirement, their legislative roadmap aimed at strengthening the U.S. retirement system.

 

The Chamber’s goals are admirable:

“To address the needs of our nation’s shifting workforce, reduce barriers small businesses face in developing retirement plans, and make it easier for all Americans to save for their future…” 

 

The roadmap details policy solution proposals that Congress can act upon to achieve better retirement security for workers in the small business sector.  Improving retirement security for the small business sector is sorely-needed, as only 14% of companies with less than 100 employees – representing 34% of private sector payrolls -- offer their employees access to a retirement plan.  

 

In general, the majority of the Chamber’s agenda should be well-received, and appears to be well-vetted.  However, one policy proposal – increasing the mandatory cash-out limit to $10,000 – could have significant, unintended and adverse consequences for retirement security, if implemented without additional safeguards. 

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Topics: Auto Portability, Mandatory Distributions, Automatic Rollovers, 401(k) Consolidation, Cash Outs, Auto Enrollment, Automatic Rollover

Why Small Balance Cash Outs Are Falling Through the Cracks

Posted by Neal Ringquist on Aug 9, 2016 11:00:00 AM

According to the recently released 2016 Willis Towers Watson U.S. Retirement Governance Survey, a major trend in retirement plan governance is the growing concern employers have for employees’ retirement benefit adequacy and financial well-being. To address this concern, sponsors indicated plans to increase monitoring of participant behaviors, using metrics such as plan participation and contribution rates, as well as carefully tracking the performance of their plans’ investment managers.

Oddly, concern over participant cash outs – certainly the most destructive behavior that participants can undertake – doesn’t make the list, despite persistent evidence that cash outs are at epidemic levels, particularly for balances under $5,000.

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Topics: Auto Portability, Mandatory Distributions, Safe Harbor IRA, Automatic Rollovers, Cash Outs, Retirement Plan Portability, Retirement Savings Portability

Force Outs: Recycle v. Landfill

Posted by Neal Ringquist on Oct 27, 2015 9:00:24 AM

 

Every day, we’re reminded that recycling is the responsible thing to do:  from the recycling bins we walk by, to the paper we use, and the cans and bottles that we drink from.   All of us would agree that conservation of our precious resources is critical, so we gladly pitch in and do our part.

 

Shouldn’t the same recycling principles apply to the small balances that are forced out of retirement plans?  

 

In the past, plan sponsors making force out decisions weren’t conditioned to think in terms of recycling.  However, this is rapidly changing as plan sponsors, service providers and policymakers look for ways to increase retirement savings and to minimize “leakage.”

 

The old, safe harbor IRA “landfill” model

 

The standard practice for retirement plan force outs has been for sponsors to move those balances to a safe harbor IRA service provider, where by law those savings are invested in a money market fund or FDIC-insured deposit vehicle.  Typically, little consideration was given to the high levels of cash outs (over 60%) that occur during the force out process, and even less to the residual safe harbor IRA balances, once they leave the plan.  

 

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Topics: Auto Portability, Mandatory Distributions, Safe Harbor IRA, Automatic Rollovers

A Blueprint for Lifetime Participation in Plans

Posted by Spencer Williams on Sep 29, 2015 3:31:46 PM

 

How many of us will be so fortunate as to participate in an employer-sponsored retirement plan every day of our working careers? Or, for an even more uncommon scenario, how many of us will work for the same company for 30 or 40 years? Yet, as has been amply established by the Employee Benefit Research Institute (EBRI), those who can raise their hands and respond “yes” to either of these questions routinely show up in the top decile of savers who are well-prepared for retirement—and these participants provide a clear blueprint for retirement-saving success.

 

In the spirit of 401(k) Day, celebrated this month, let’s take a moment to reflect on the important role 401(k) plans play in enhancing the economic well-being of America’s mobile workforce—and how we can continue to improve retirement readiness by creating a leading-edge blueprint for lifetime participation in plans.

 

Only a very small minority of participants are lucky enough to be part of the same company for over 40 years; according to EBRI, the average American will have more than seven jobs before retirement. And while 401(k) participants can legally move their savings forward from one employer to the next, on a practical basis it’s not so simple. In order to move their savings, participants first have to convert all their 401(k) investments to cash, close their account in their former employer’s plan, enroll in their new employer’s plan and, finally, transfer their savings.

 

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Topics: EBN, Auto Portability, Mandatory Distributions

Deadlines for Year-End Plan Terminations, Mandatory Distributions Fast Approaching

Posted by Michael Wilder on Sep 21, 2015 11:25:00 AM

At Retirement Clearinghouse (RCH), the 4th quarter is the busiest time of the year, as many plan sponsors look to complete plan terminations and mandatory distributions before the end of the year. However, to follow appropriate communication timeframes, deadlines to initiate the necessary communications process needed to complete these year-end plan initiatives are fast approaching.

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Topics: Mandatory Distributions, Automatic Rollovers, Plan Termination

One Solution to Three Costly Retirement-Saving Mistakes

Posted by Neal Ringquist on Sep 2, 2015 4:37:00 PM

 

In his September 2nd, 2015 MarketWatch article One Solution to Three Costly Retirement-Saving Mistakes, RCH’s CEO Spencer Williams provides insight as to why a majority of Americans are not very confident in their retirement readiness. Three costly mistakes consistently plague retirement savers:  1) leaving 401(k) accounts behind when changing jobs, 2) prematurely cashing out and 3) not informing prior employers’ retirement plan record-keepers about address changes.

 

While these common mistakes can be costly, Williams identifies a simple way to avoid them – by consolidating your retirement savings when you change jobs.  

 

Finally, Williams offers practical advice on how retirement savers can get the consolidation process started.

 

Click Here to Read the MarketWatch article, One Solution to Three Costly Retirement-Saving Mistakes.

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Topics: Auto Portability, Mandatory Distributions, MarketWatch, Safe Harbor IRA, Automatic Rollovers, Missing Participants, Common Mistakes

Automatically Moving Mandatory Distributions Forward

Posted by Neal Ringquist on Aug 11, 2015 4:01:11 PM

 

The Case for Automatically Moving Mandatory Distributions Forward

The mandatory distribution-to-Safe Harbor IRA plan feature as commonly utilized today was conceived in 2001 and launched in 2005 with good intentions, and for valid reasons. A mobile workforce, combined with a lack of retirement savings portability, had created a burgeoning problem for plan sponsors: an explosion of small-balance (less than $5,000) accounts left “stranded” in-plan, resulting in rampant cashouts, missing participants, uncashed distribution checks and the like. These problems only accelerated with the widespread adoption of auto enrollment, beginning in 2009.  

 

While automatic rollover programs provided a measure of relief to the problems faced by plan sponsors, they inadvertently consigned their former plan participants to Safe Harbor IRA “landfills” – where cashouts continue and account fees erode their balances.

 

Fortunately, there’s a more-responsible answer: to systemically “recycle” these Safe Harbor IRA balances back into the defined contribution system.

 

First, Some History and Simple Math

 

In 2001, when Congress passed The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), it gave birth to the Safe Harbor IRA by amending the Internal Revenue Code to add a requirement that mandatory distributions in excess of $1,000 must be paid in a direct rollover to an IRA. At this time, T-Bill rates were over 6%. In March 2006, when the Department of Labor issued safe harbor regulations launching the automatic rollover, T-Bill rates were 2.6%. Today, T-Bill rates are .075%. This is material because the IRA agreement the plan fiduciary must enter into as per the regulations must provide that the investments “will be those designed to minimize risk, preserve principal while providing a reasonable rate of return, and maintain liquidity, such as money market funds, interest-bearing savings accounts, certificates of deposit and fully benefit-responsive stable value funds.”  

 

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Topics: Auto Portability, Mandatory Distributions, Safe Harbor IRA, Automatic Rollovers, Missing Participants, Lost Participants

How to Make Mandatory Distributions More Fiduciary Friendly

Posted by Spencer Williams on Jun 16, 2015 11:23:00 AM

 

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?”

 

Fortunately, after reviewing the basic rules laid out by ERISA, we can readily identify a handful of superior, “bright line” program attributes that are clearly “fiduciary friendly.” Let’s explore each of these features to see how they provide more complete fiduciary protection for an employer-sponsored plan’s mandatory distribution program.

 

  1. Assessment of Monthly vs. Annual Fees: Based on experience[i], assessing administrative fees monthly will save 45% of safe harbor IRA accountholders an average of 51% in fees—a much more compelling option than a comparable annual fee. 

 

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Topics: EBN, Auto Portability, Mandatory Distributions

Alicia Munnell: "Clearinghouse for Small 401(k) Accounts a Good Idea"

Posted by Kristen Miller on Apr 8, 2015 9:05:00 AM

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. 


Click Here to read Alica Munnell's full article in MarketWatch titled, "A Clearinghouse For Small 401(k) Accounts a Good Idea."

 

 

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Topics: Auto Portability, Mandatory Distributions, MarketWatch

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