By Neal Ringquist
In January, Alight Solutions released 2020 Hot Topics in Retirement & Financial Wellbeing, a survey of 130 plan sponsors employing 5.5 million workers and highlighting key trends among plan sponsors, including expanding financial wellbeing programs, increasing efforts to help participants bridge the gap between working and retiring, and strengthening programs to locate missing participants.
Just as the trends identified in the Alight survey were influenced by initiatives committed to in the 4th quarter of last year, sponsors are now applying finishing touches to 2021 tactical initiatives that will help drive improvements to their plans and boost the retirement outcomes for plan participants.
Here are three 2021 “resolutions” that we believe fit nicely with the trends identified in the Alight survey.
Resolution #1: End Automatic Cash-Outs: Sponsors are permitted to automatically cash out accounts with less than $1,000 which have been left behind by former participants, and most do so—almost 90% of plan sponsors have a policy to cash out terminated-participant balances which are below $1,000, according to the latest Plan Sponsor Council of America (PSCA) Annual Survey of Profit Sharing and 401(k) Plans.
While permitted, the practice sends a very bad message. Sponsors have an obligation as fiduciaries to make decisions that are in participants’ best interests, and automatically cashing out small, stranded accounts seriously harms the retirement prospects for the holders of those accounts—especially if their contact details are out-of-date, and as a result, they don’t receive the check or related notices in the mail.
Industry research indicates that, counter to prevailing practices, participants do care about small accounts they leave behind in former-employer plans. In Boston Research Technologies CEO Warren Cormier’s recently published white paper, Making the Right Choice the Easiest Choice: Eliminating Friction and Leaks in America’s Defined Contribution System, 91% of the participants in a 401(k) plan with a large healthcare services provider who received a notice indicating they could have their safe harbor IRA rolled into their active accounts in the plan gave their consent to the roll-in and even paid a small fee to have their savings transported to their active accounts.
In fact, over half of the accounts rolled in were less than $1,000. These rolled-in IRA accounts were originally funded through a mandatory distribution from a former-employer plan, rather than automatically cashed out by the healthcare services provider’s plan. The study demonstrates that, when given an easy way to do so, participants would prefer to keep these balances in the retirement system moving forward with them as they change jobs.
Resolution #2: Offer an Assisted Roll-In Service as Part of a Financial Wellness Program: With industry research showing pent-up demand among participants for a comprehensive roll-in solution for their prior employer 401(k) accounts, sponsors should fulfill their fiduciary duty by offering consolidation/roll-in assistance as part of their financial wellness programs, particularly for new hires.
A groundbreaking May 2015 study by Warren Cormier, Portability and the Mobile Workforce, indicated overwhelming interest by participants in an assisted roll-in program, where 93% of the survey respondents viewed an assisted roll-in program as a good or excellent benefit.
Besides representing a great benefit to participants, a resolution to offer roll-ins is easy for sponsors to implement. According to the PSCA Annual Survey referenced earlier, 97.2% of defined contribution plans already allow roll-ins from other plans. With the vast majority of sponsors not having to make any changes to their plans in order to offer roll-in assistance, all they must do is to actively promote their plans as desirable destinations for consolidated retirement savings – calling attention to the investment options and other benefits that they and their record-keepers can provide participants.
Financial wellness is tough to measure, but the results of a roll-in program are easy to quantify—and use as a concrete metric to play up the performance and health of a plan for participants and the retirement services industry. Sponsors that need help with processing and managing roll-ins or who wish to improve their roll-in program results can choose to engage a roll-in service provider.
Resolution #3: Pilot a Distribution Assistance Program: The flip side of a roll-in program is a facilitated roll-out program.
When changing jobs, participants typically receive a termination notice outlining their options for the retirement account (leave it in the plan, cash out, roll it to an IRA, roll it to a new employer plan), often accompanied by a distribution form. Most participants take the easiest paths – cashing out or leaving the balance behind – as neither decision involves the headache of processing contribution forms for an IRA or the new employer plan. Unfortunately, cashing out wreaks havoc on retirement outcomes, while leaving balances behind involves the headache of keeping address information up to date – many don’t, driving the missing participant fiduciary problem for the plan sponsor.
One solution is to provide newly terminated participants access to an independent fiduciary to help them with the fiduciary decision. Add to that a transaction program that allows the participant to easily implement the decision. That combination can be implemented at no cost to the sponsor, very little cost to the participant, and will mitigate fiduciary risk by reducing missing participants and lowering cashouts.
Finally, a facilitated roll-out program can assist participants who are at or near retirement with the transition to retirement income, by offering annuity purchase options.
Such a distribution assistance program can be easily implemented on a pilot basis.
Make 2021 Better by Facilitating Portability
Initiatives that facilitate portability are the hot new trend for plan sponsors, since they not only reduce fiduciary risk but make significant, quantifiable contributions to employee financial wellness programs by preserving retirement savings.
As the old saying goes, there’s always room for improvement. This is true for plan sponsors as well as individuals, and these small but eminently do-able resolutions will yield huge benefits for both in 2021.Back