It’s widely-accepted that retirement savings portability has proven to address the small account problem for 401k plan sponsors, as well as preserve participants’ savings currently lost to cash-out leakage.
However, the concept of retirement savings portability is relatively new. At year-end, most plan sponsor attention will be focused on other plan design issues, such as auto enrollment and escalation, the lineup of investment options, enrollment, education, retirement income solutions and so forth.
Sadly, many sponsors could miss an important opportunity to make straightforward changes to enhance portability, changes 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.
- Amend your plan to eliminate forced cash-outs for accounts below $1,000
Today, many plan sponsors elect to automatically cash out the balances of separated participants whose account has less than $1,000. While this may seem like a prudent feature, it can lead to problems down the road, coming primarily in the form of uncashed distribution checks.
A better approach is to eliminate this practice, and include these balances in an automatic rollover program.
- Implement an automatic rollover program that conforms to the principles of auto portability
Your plan may already have an automatic rollover feature, but it likely results in cash-out levels of over 60 percent at the time of separation. Former employees who don’t cash out their small balances will see their savings languish in a safe harbor IRA “landfill,” eroded by fees and low investment returns.
An automatic rollover program that conforms the principles of auto portability is a better solution. Auto portability has fundamentally changed the dynamic for automatic rollovers, slashing initial cash-out levels by over 50 percent, while proactively searching for former participants’ current, active plans to “recycle” these balances back into the defined contribution system.
If you have an automatic rollover provider or are considering adding one for a new force-out initiative, Include cash-out and asset retention metrics among evaluation/monitoring criteria for the automatic rollover providers in use or under consideration.
- Ensure that your plan allows rollover contributions, or ‘roll-ins’
Giving your plan’s participants the ability to consolidate their retirement savings from both their previous retirement plans and IRAs will not only improve their financial wellness, it will increase your plan’s assets, which serve to lower your plan’s costs.
All it requires is a simple change in your plan’s documentation. Once enabled, make your participants aware of the roll-in feature and promote its use. If you want to dramatically increase roll-ins and make the process easy for your participants, consider a service that facilitates roll-in transactions.
A 2015 Boston Research Technologies study on the mobile workforce found that participants would eagerly embrace a facilitated roll-in service.
- When asked if they would take advantage of a sponsor-provided roll-in service to help with the consolidation process, 83 percent of Millennials, 83 percent of Generation-Xers and 78 percent of Baby Boomers responded affirmatively—if the plan paid for it.
- The study found that even more participants—91 percent of Millennials, 89 percent of Gen-Xers and 65 percent of Baby Boomers—would likely roll IRA balances into the plan if such a service existed.
- Finally, 93 percent of participants said a roll-in service would be a “good” or “excellent” benefit compared with other employee benefits received from their employer.
- Locate missing participants and resolve uncashed distribution checks
Missing participants and uncashed distribution checks can increase fiduciary liability and create administrative burdens. While you’re taking steps to minimize these problems on an ongoing basis by increasing retirement savings portability, make sure that you clean up the residual problems of the past.
To locate missing participants, engage a service provider who has a track record of success. Similarly, consider engaging a provider who can help resolve your uncashed distribution checks.
- Begin preparations now for any year-end plan terminations
Terminating a retirement plan can be daunting. There’s a lot to do, and if it’s not done correctly, it will generate even more work and increase the risk of an audit. As most plan terminations are the result of an acquisition, retaining retirement assets in the remaining active plan can improve plan metrics while helping participants with their retirement readiness. A properly done plan termination will ensure that participants’ retirement savings are preserved by consolidating their savings into their current plan.
We suggest that you look at your plan termination initiative in the following phases:
- Planning and preparation
- Announcement and notification
- Location of missing participants
- Distribution of plan assets
- Final plan termination
Taking these five steps now will help ensure that your plan, as well as your plan’s participants, will reap the benefits of retirement savings portability in 2018.
Neal Ringquist is executive vice president of sales and marketing for Retirement Clearinghouse. In this capacity, he is responsible for the company’s overall marketing strategy and plan sponsor sales channel.