TRANSCRIPT:

Tom Hawkins: Welcome to another edition of the RCH Consolidation Corner Channel, where we provide you with audio content that explores key issues in the preservation and consolidation of retirement savings. Today, we’ll be examining the topic of “traditional” automatic rollover IRAs, which we believe will be rapidly eclipsed by auto portability. We hope you’ll find the audio enjoyable and informative.

NARRATOR: Let's face it - automatic rollover IRAs have been around a long time, and, until recently, it's been the same old story.

Consider providers who tout their "world-class" automatic rollover IRA services. What exactly is "world class" about them? These claims can serve to mask the reality of traditional, high-fee products that populate safe harbor IRA "landfills" where small retirement balances go to deteriorate. The truth is that participants who are subject to their plan's automatic rollover provisions don't need fancy features, but will fare much better in low-fee transitional accounts that preserve their retirement savings until consolidation into a current employer's plan or another IRA becomes possible.

Looking at the numbers, the participant experience with traditional automatic rollover IRAs is disturbing. For every 1,000 participants subject to this process, 55% will cash out immediately, 6% will move their funds to another retirement account, and 39% will end up in safe harbor IRAs with their savings invested in a default money market fund. For those 39% whose funds make it into safe harbor IRAs, 6-12% annually will either cash out or see their balances eroded by fees, while only 1% will move their money out of the default investment.

To make matters worse, traditional automatic rollover IRAs often impose numerous fees including setup charges (up to 20% of initial balance), asset management fees (up to 2.75% annually), maintenance fees, distribution fees, account closure charges, search fees for missing participants, paper statement fees, escheatment fees, and various miscellaneous transaction charges. Finally, many providers erect barriers to exit, requiring costly medallion signature guarantees.

A better approach utilizes transitional automatic rollover IRAs that serve as low-cost, temporary accounts to preserve retirement savings while facilitating consolidation through auto portability. Key features should also include pre-rollover education about the cost of cashing out, assistance with balance consolidation, integration with auto portability, and transparent tracking of program outcomes versus industry standards.

When evaluating automatic rollover IRA providers, look beyond the marketing claims and examine their underlying fee structures and participant outcomes to avoid solutions that promote excessive cashouts, unreasonable fees, and barriers to account consolidation.

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