It’s commonly accepted for 401(k) and retirement plan sponsors to focus on three major initiatives to promote retirement adequacy: participation, saving and diversification.
While these three initiatives are proven, an emerging best practice is for plan sponsors to expand this list, incorporating consolidation, where plan participants are encouraged to consolidate balances from former employers’ plans, using their current employer’s plan to manage their retirement savings.
Why Consolidation?
The American worker is highly-mobile, changing jobs over seven times in a career, and relocating once every seven years. At the same time, participation in plans has increased substantially, primarily due to auto-enrollment.
These facts, combined with “do-it-yourself” portability, have resulted in an explosion of stranded, small-balance retirement savings accounts – or worse – unnecessary cashouts. Past leakage and cash out studies by the GAO, Aon Hewitt and Fidelity have all shown a clear correlation between account balance and cash out rates: the higher the retirement account balance, the lower the cash out rate.
Consolidation fundamentally changes the small account dynamic, delivering real benefits to plan sponsors and their participants.
For plan sponsors, promoting consolidation into the active plan (roll-in) is a cost-effective way to increase participants’ average account balances and reduce the incidence of stranded accounts and cash outs. Encouraging terminated participants to take their balance with them as they change jobs promotes consolidation as a best practice for participant behavior, and reduces the incidence of lost and missing participants.
For participants, combining stranded accounts into a single retirement account allows for more effective management of retirement savings and reduces their likelihood of cashing out, thereby leaving more savings to grow tax-deferred. For those in large employer-sponsored plans, the active 401k account is often the preferred option, due to lower fees and access to cost-effective advice and guidance.
In addition to improving financial security, recent news headlines indicate that consolidation could improve cybersecurity. By consolidating their retirement savings, participants reduce the number of potential at-risk accounts held by multiple recordkeeping service providers, minimizing their odds for identity theft.
Plan Participants Want to Consolidate
Will plan participants take advantage of a consolidation program? The answer is a resounding “yes.”
In 2015, a study of America’s mobile workforce by Boston Research Technologies revealed that plan participants across all age groups overwhelmingly want to use their employer-sponsored plan as a consolidation vehicle for their retirement savings, and would take advantage of a program that made the consolidation process easier.
While auto-enrollment (participation), auto deferral increases (saving) and target date funds (diversification) have dominated plan sponsor initiatives of late, it’s time to make room on the sponsor’s menu for a new best practice in 2018—consolidation.
Neal Ringquist is Retirement Clearinghouse's Executive Vice President & Chief Revenue Officer and is a member of RCH's Executive Leadership Team. Ringquist is responsible for the company's overall marketing strategy and for all institutional sales activities.
Neal Ringquist has been at the forefront of developing and delivering innovative wealth management solutions to the retirement and investment advisory market for more than 25 years. He joined RCH from Advisor Software, Inc. (ASI), where he served as President and Chief Operating Officer for nine years.Previously, Ringquist was vice president of sales and marketing for Morningstar Associates, LLC, a registered investment advisor. Earlier, he was executive vice president of sales, marketing and client service for mPower.com, Inc.(acquired by Morningstar), which established him as one of the early enterers into the online advice movement.
He was also Senior Vice President and manager of Institutional Trust Investment Services for Wells Fargo Bank, where he was responsible for portfolio management and investment product delivery for institutional trust clients. Ringquist also held positions with Bankers Trust Company and William M. Mercer Inc.
