By Thomas Hawkins
In virtually any area of specialty, a unique jargon evolves that’s highly-specific to that field. To insiders using the lingo every day, it seems familiar and perfectly normal. To outside observers, it can feel like a foreign language -- with words, terms and acronyms that make no sense.
That’s particularly true in the highly-specialized realm in which we (Retirement Clearinghouse) exist: the land of retirement savings portability. This article provides you with an orientation to terms that you may not be aware of, but terms that are becoming more-and-more common and noteworthy, as elements of retirement savings portability take hold.
The Rise of “Automatic Rollover” and Related Terms
The story begins in 2001. In that year, the 107th Congress of the United States passed EGTRRA, otherwise known as the Economic Growth Tax Relief Reconciliation Act. EGTRRA set forth rules dictating that employer-sponsored, qualified plans could make automatic, mandatory distributions to terminated employees without their consent for small balances (less than $5,000), provided that balances between $1,000 and $5,000 be automatically rolled over to an IRA.
In 2004, the Department of Labor (DOL) issued final rules describing the automatic rollover safe harbor for plan fiduciaries tasked with choosing safe harbor IRA providers, as well as the initial IRA investments. The DOL’s rules applied to distributions made on or after March 28, 2005.
Thus, the terms automatic rollover and safe harbor IRA were born, and Retirement Clearinghouse soon processed our first automatic rollover in April 2005.
Over time, variations of these terms – all meaning the same thing -- began to arise: ARO: an acronym for automatic rollover Force Out: the process of moving a small-balance, terminated participant out of plan, without their consent Variations of “automatic rollover” including: Auto Rollover Automatic Rollover IRA Auto Rollover IRA Automatic IRA Rollover Automatic Force OutTo confuse matters a bit, around 2009 the unrelated term “Automatic IRA” began to enter our lexicon. In contrast to an automatic rollover, the automatic IRA is an initiative at the state (and soon, possibly Federal) level, allowing employees not covered by qualified retirement plans to save for retirement through automatic payroll contributions to an IRA.
Note: If the “automatic rollover” described above sounds like a one-way ticket to a small-balance IRA, we’ll explain its relationship to retirement savings portability in just a moment.
Enter the “Roll-In”
Prior to 2011, the term “retirement savings portability” was synonymous with “IRA rollover.” Practically speaking -- besides a cash out -- a rollover to an IRA was the only form of portability available to the vast majority of 401(k) participants.
In 2011, working with a mega plan sponsor, Retirement Clearinghouse pioneered true plan-to-plan retirement savings portability with the first program designed to routinely transfer participants’ “stranded” 401(k) balances at previous employers into their current plan -- a process we coined the “roll-in.” While the DOL classifies these transactions as “rollover contributions” in their Form 5500 reporting, we felt that the term “roll-in” was more descriptive, not to mention more catchy!
Today, most plans include a roll-in feature, but leave participants to their own devices to accomplish this transaction – a confusing ordeal that we refer to as a “DIY Roll-In.” As more plans begin to offer facilitated roll-in services to their participants, the term “roll-in” has begun to gain popularity. It’s now common to see “roll-in” being used in industry publications and articles, by the Treasury -- even by the DOL’s ERISA Advisory Council.
Auto Portability – The Marriage of the Automatic Rollover and the Roll-In
With plan usage of automatic rollovers and roll-ins on the rise, Retirement Clearinghouse saw the possibility of marrying the two. If, working with 401(k) recordkeepers, we could locate-and-match a safe harbor IRA accountholder’s current plan, then why not automatically transfer (roll-in) their balance into that plan? After all, they were involuntarily forced-out of their former plan, so perhaps we could execute the roll-in transaction automatically, or as an automatic roll-in.
The automatic roll-in had the power to transform the practice of automatic rollovers from a “landfill” operation – a place where small-balance safe harbor IRAs are exiled -- into a recycling operation where “automatic” means moving these small balance force-outs all the way forward to the participant’s current, active 401(k) plan, a process we dubbed “Auto Portability.”
As members of the retirement savings community began to understand the concept – including plan sponsors, regulators, legislators and recordkeepers – the term “Auto Portability” began to spread, along with the more-general notion of retirement savings portability.
In late 2015, a bicameral group of Congressional members issued a letter to the Department of Labor, urging the DOL to move Auto Portability forward by finalizing an Advisory Opinion on the use of negative consent, so that automatic roll-ins of safe harbor IRA accounts could take place.
Shortly thereafter, President Obama called for enhanced retirement savings portability in his January 2016 State of the Union address, followed by specific portability initiatives in his 2017 budget proposal.
Finally, this month, the DOL released the final version of its long anticipated Fiduciary Rule. The new rule focused on the appropriate behavior of service providers providing advice to plan participants on the movement of their retirement savings at distribution, taking on the practice of brokers “harvesting” rollover IRAs.
With everyone now climbing on the portability bandwagon, and with the DOL poised to generate an Advisory Opinion on the use of negative consent, the language and practice of retirement savings portability will become less-arcane and much more commonly applied.
If things progress as we believe they will, you’ll likely soon see: Plan sponsors and recordkeepers outsource distribution guidance -- or “participant transition management” -- to non-conflicted, unbiased service providers A dramatic rise in the use of facilitated roll-ins by 401(k) participants, consolidating “stranded” qualified retirement plans into their current 401(k) plan The pairing of automatic rollovers with roll-ins – in the form of Auto Portability -- will become an essential feature of every 401(k) plan, transforming safe harbor IRAs from “landfills” to “recycling” operations. A steep drop in the level of cash outs, as 401(k) savers are presented with a simple and easy path to consolidation of their retirement savings.Very soon, many more people will be speaking our language!