Safe Harbor IRA Landfill vs. RCH Recycle 401k Consolidation Auto Portability

By Neal Ringquist

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 (through an automatic rollover program) 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.

As a result, most safe harbor IRA service providers have become the equivalent of landfill operators – taking in balances and charging account maintenance fees. Like landfill waste, these safe harbor IRAs decay over time, as paltry returns from ultra-safe investments fail to cover the account maintenance fees. In fact, when performing due diligence for plan sponsors, many plan consultants actually use “decay rate” as a criteria to compare safe harbor IRA service providers!

Auto Portability: A concept built on the recycling approach
There is a better way: recycle those mandatory distributions.

Instead of dumping force outs into a landfill, Auto Portability recycles those balances back into the retirement plan system. The balances are automatically rolled in to the participant’s active 401(k) plan. The majority of 401(k) plans today use a target date fund as a default vehicle – a more appropriate long term investment vehicle than a cash-type investment vehicles in safe harbor IRAs.

Certainly, the Department of Labor thinks so – The Pension Protection Act of 2006 drove the migration of default investments in 401(k) plan from cash-like investments to target date funds and managed accounts. Absent a similar change in regulations impacting investments in the safe harbor IRA, the appropriate fiduciary approach to force outs is to recycle those balances back into the retirement system. This is done by selecting a safe harbor IRA service provider fully-committed to Auto Portability.