401(k) retirement plan features—from automatic enrollment to automatic escalation to automatic investment—have made it easier for employees to build retirement savings through workplace 401k plans. In fact, plan participation is up 19 percent.[1]
While progress has been made on the savings front, the impact of these gains on retirement readiness could be magnified if plan sponsors, recordkeepers, and investment providers were able to build a system that would minimize early withdrawals. Studies show that roughly $0.40 of every dollar contributed to plan accounts by participants who are younger than age 55 is distributed to the 401(k) participant before retirement.[2]
We believe the key to preserving assets is simplifying the process for roll-ins and rollovers and roll-ins to new employers. Employees change jobs every three years or so, and almost two-thirds of those who cashout retirement savings say they do it, despite penalties and taxes, because it’s the easiest course of action.[3]
If the process for transferring of assets from a previous employer’s qualified plan (or several previous employers’ plans) into a new employer’s qualified plan or to an IRA was streamlined, America’s retirement readiness could be significantly improved. There are several issues that need to be addressed in order for this to occur.
Develop more efficient communications
A key issue is communication. Many 401(k) plan sponsors, recordkeepers, and investment providers rely on archaic forms of communication. These include facsimiles, paper forms, and snail mail, which may present security risks and are exasperating for younger participants. In addition, the slower pace of traditional communications has the potential to create delays that result in a failure to transfer qualified assets within required time frames.
One way to resolve this issue is to begin accepting signed documents via email or providing plan portals — secure online storage that offers an alternative to e-mail.
Standardize the system
While speedy communications are important, they would function most effectively within a standardized system. Today, plan sponsors, recordkeepers, and investment providers have distinct requirements and processes that must be followed by participants who wish to rollover or roll-in plan assets. Often, successfully completing a roll-in to a new employer’s plan, or a rollover to an IRA, requires a plan participant to jump through a series of hoops.
Consider Amanda, a millennial in the financial services industry. She left her company and decided to rollover her 401(k) assets, which were split between Traditional and Roth accounts, into Traditional and Roth IRAs at her brokerage firm.
Amanda called the human resources group at her prior employer. They directed her to the plan’s investment provider. The investment provider told her to contact her brokerage firm. Amanda did, and learned that she needed to establish traditional and Roth IRA accounts at the brokerage firm before assets could be transferred.
Remarkably, the only way to set up the brokerage IRA accounts was by facsimile. Amanda (a first-time fax user) located a fax, sent the documents, and followed up with a phone call to confirm her fax was received.
The next step in Amanda’s rollover odyssey was calling the investment provider and initiating the rollovers. She wanted to transfer the assets in-kind because she wanted to keep her money invested in the target-date funds she owned. Amanda was told it was not possible to transfer the assets in-kind.
Amanda sold the funds in her 401(k) accounts, planning to buy them back when her assets transferred, and asked that the cash be electronically transferred to her IRA accounts. She was that was not possible. The investment provider could not transfer funds electronically nor could they send paper checks directly to her brokerage firm. Instead, the company mailed two paper checks to Amanda’s home.
This created some anxiety about whether the funds would transfer in a timely way, so that Amanda could meet the deadline for rollovers. They did. However, the market moved a few points higher during the weeks that Amanda’s new accounts were being set up and her retirement assets were floating around as paper checks, so she missed out on those gains.
Amanda’s story highlights the challenges and inefficiency of the current system. The piecemeal nature of the process results in delays and frustrations. In the best case, a participant asks all the right questions, understands every required step, and the asset transfer goes smoothly. In the worst case, the participant gets overwhelmed and cashes out.
We would like to see a system that networks recordkeepers to facilitate asset transfers between employers. The major recordkeepers are connected with most plan sponsors and they are repositories of participant data. If we standardized the technology and processes used by plan sponsors, recordkeepers, and investment providers, a more efficient network of plan and participant data could be created. The new system would include participants’ names, addresses, Social Security numbers, dates of birth, and beneficiary information, as well as plan names and identifying numbers.
When a roll-in is requested, the assets would flow through the streamlined system quickly and accurately. There would be clear direction from the plan sponsor, along with identifying numbers and electronic signatures from participants authorizing transfers. The process would work equally well when plan participants wanted to move assets to IRAs or from IRAs to plans.
In our vision, there would be an independent organization that would facilitate communications, protect confidential information, and maximize efficiencies. It is possible to employ technology and create a system that allows plan participants to complete forms online and transfer their balances smoothly and efficiently, regardless of recordkeeper.
In the meantime, offer step-by-step education
The ERISA Advisory Council reports that one-half of participants who have taken cash distributions from qualified plans would not have done so if it were as easy to roll-in or rollover as it was to cash out. Many retirement education programs already explain distribution choices and their implications. However, until a streamlined system is developed, participant education programs could help reduce the incidence of cash-outs by providing detailed and up-to-date roll-in rollover instructions to participants and to new employees.
In summary
It is critical for retirement plan providers to stay abreast of the latest technology and have systems in place that work for plan sponsors and participants. Currently, plan sponsors, recordkeepers, and investment providers rely on a patchwork of processes and communications, hoping plan participants will have the gumption to work their way through each process so that retirement assets will be preserved.
That’s just not good enough anymore. In 2015, the Employee Benefit Research Institute reported, “The aggregate national retirement deficit number is currently estimated to be $4.13 trillion for all U.S. households where the head of the household is between 35 and 64, inclusive.”[4]
If retirement asset leakage — including early distributions from qualified plans, defaults on loans from qualified plan accounts, and hardship withdrawals — were removed, we would see a significant increase in the percentages of plan participants who were able to cover 80 percent of average expenses in retirement, including long-term care costs.[5] The technology required to streamline rollovers and roll-ins is available. An investment of time and money, as well as a commitment to standardization, would be required to build an efficient and straightforward system. It is the next step—a vital step—in the journey toward retirement readiness.
Terry Dunne is Senior Vice President and Managing Director of Rollover Solutions Group at Millennium Trust Company, LLC. Mr. Dunne has over 35 years of extensive consulting experience in the financial services industry. Millennium Trust Company, LLC acts as a directed custodian, and does not provide tax, legal, or investment advice.
[1] Gladych, Paula Aven. Automation making huge retirement plan impact. Employee Benefit News. July 21, 2016. http://www.benefitnews.com/news/automation-making-huge-retirement-plan-impact?tag=00000153-801e-dac7-ad73-d1be0b3f0000 [2] Argento, Robert. Bryant, Victoria. Sabelhaus, John. Early Withdrawals From Retirement Accounts During The Great Recession. Contemporary Economic Policy. 33: 1–16. January 2015. http://onlinelibrary.wiley.com/doi/10.1111/coep.12064/abstract [3] EBRI.com. ‘Reducing Retirement Savings Leakage.’ EBRI Notes, August 2016. Vol. 37. No. 9. https://www.ebri.org/pdf/notespdf/EBRI_Notes_07-no9-Aug16.PolFor-Ret.pdf [4] VanDerhei, Jack. Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model®. EBRI Issue Brief, No. 410. February 2015. https://www.ebri.org/pdf/briefspdf/EBRI_IB_410_Feb15_RS-Shrtfls.pdf [5] Blakely, Stephen. What Moves the Retirement Readiness Needle: Quantification of Risk and Evaluation of New Proposals. EBRI Notes, Vol. 37, No. 5, p. 4. April 2016. https://www.ebri.org/pdf/notespdf/EBRI_Notes_05_Apri16.Ret-PolFor.pdf [6] U.S. Department of Labor https://www.dol.gov/sites/default/files/ebsa/temporary-postings/savings-arrangements-final-rule.pdf
Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
So we’re going to create a database that every record keeper feeds data into for their plans & participants, and that data is going to make it easier for those participants to take their assets away from those record keepers? I love the idea for the participant’s sake, but I have a hard time believing that any of the major players (especially the ones that also manage mutual funds) are going to go for this.
Here’s a few ideas to curtail leakage:
Increase the 10% Penalty – especially for younger workers, it’s just not enough of a deterrent to cashing out. Make the penalty 40% for workers in their 20’s, 30% for those in their 30’s, 20% in their 40’s, and 10% for those in their 50’s. Leakage isn’t as much of a problem for older workers as it is for younger ones, and it’s probably more critical for younger folks to stay invested as early as they can. Folks in their 40’s & 50’s have figured out the importance of saving for retirement, so their penalty doesn’t need to be as stiff. They also (should) have larger balances, so any penalty to them will cost them something substantial, where a younger worker likely hasn’t accumulated enough that anything short of taking away almost all of the money will have an impact.
Add a 5-year rule – similar to the 5-year rule on a Roth account, make it so that someone can’t cash out their retirement account until it’s been open for 5 years. They can roll it over, but can’t cash it out. Most younger folks hop jobs more frequently than 5 years, so this would help to keep their accounts intact. The rollover process certainly can be a painful one, but that doesn’t mean the easy out should be the one that hurts the most.
Yes, technology is available today that would allow the creation of a database in which record keepers could feed data about their plans and participants.
That data would be easy for participants to see, and, yes, the participants would have ease in taking assets away from those record keepers. Also, I do think record keepers will want to participate in this process. Largely, they will want to participate because if they don’t, the government will likely do it for them by mandating their involvement. Additionally, once the most important record keepers do this, others will follow. The registry concept is important and will happen.
Agreed, leakage is a big concern and suggestions of penalties and taxes would work at minimizing leakage. However, why would we want to move money from people, money that they earned, to the government? I know that financial education hasn’t worked in the past, but I’m hopeful that we can figure out how to inform people of the incredible importance of saving for retirement, and how contributing to a retirement plan is a must.