On February 3U.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
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.
Good for Small Business, Bad for the Mobile Workforce
IRC Section 401(a)(31)(B) allows plan sponsors to force-out separated participants’ accounts with balances under $5,000 into safe harbor IRAs, otherwise known as an automatic rollover. The essence of the Chamber’s recommendation is to increase the separated participants’ balances subject to force-out from $5,000 to $10,000.
It’s obvious why this position should appeal to employers. An increasingly mobile workforce, combined with the growing popularity of auto enrollment, has resulted in an explosion of small accounts, which carry additional costs, administrative burdens and fiduciary risk. The Employee Benefit Research Institute (EBRI) estimates that 38%, or 5.2 million of the 13.6 million participants changing jobs each year have retirement account balances less than $5,000. Under the Chamber’s recommendations, the new $10,000 automatic rollover threshold would apply to 48%, or 6.6 million job-changing participants.
Given the choice of “holding the bag” of cost and risk associated with burgeoning small-balance, separated participants, the Plan Sponsor Council of America’s 59 finds that over 59% of plans will force-out these participants by adopting an automatic rollover provision. Annual Survey
While good for employers, automatic rollovers haven’t been good for the retirement security of the participant. The problem is bad participant outcomes, principally coming in the form of cash-out leakage.
Small Account Cash-Out Leakage
- study of mobile workforce behaviors by Boston Research Technologies (BRT) found that 62% of participants who had completed a roll-in did so with outside help, and took, on average, a month to complete.
- Not surprisingly, the same study found that 93% of participants considered a service to facilitate roll-ins a “good” or “excellent” benefit, if offered by their employer.
Bottom line: the friction associated with portability in today’s retirement system will continue to produce poor outcomes for participants unless changes are made.