Today, it’s commonly-accepted practice for retirement plan sponsors to focus on three major initiatives to promote retirement adequacy: participation, saving and diversification.
While these three initiatives are proven, an emerging best practice is for plan sponsors to expand this list, incorporating consolidation, where plan participants are encouraged to consolidate balances from former employers’ plans, using their current-employer’s plan to manage their retirement savings.
The American worker is highly-mobile, changing jobs over seven times in a career, and relocating once every 7 years. At the same time, participation in plans has increased substantially, primarily due to auto enrollment.
These facts, combined with “do-it-yourself” portability, have resulted in an explosion of stranded, small-balance retirement savings accounts – or worse – unnecessary cash outs. Past leakage/cash out studies by the GAO, Aon Hewitt and Fidelity have all shown a clear correlation between account balance and cash out rates: the higher the retirement account balance, the lower the cash out rate.
Consolidation fundamentally changes the small account dynamic, delivering real benefits to plan sponsors and their participants.
For plan sponsors, promoting consolidation into the active plan (roll-in) is a cost-effective way to increase participants’ average account balances and reduce the incidence of stranded accounts and cash outs. Encouraging terminated participants to take their balance with them as they change jobs promotes consolidation as a best practice for participant behavior, and reduces the incidence of lost & missing participants.
For participants, combining those stranded accounts into a single retirement account allows for more effective management of retirement savings and reduces their likelihood of cashing out, thereby leaving more savings to grow tax-deferred. For participants in large employer-sponsored plans, the active 401(k) account is often the preferred option, due to lower fees and access to cost-effective advice and guidance.
In addition to improving financial security, recent news headlines indicate that consolidation could improve cyber security. By consolidating their retirement savings, participants reduce the number of potential at-risk accounts held by multiple recordkeeping service providers, minimizing their odds for identity theft.
Plan Participants Want to Consolidate
Will plan participants take advantage of a consolidation program? The answer is a resounding “yes.”
In 2015, a study of America’s mobile workforce (summary, detail) by Boston Research Technologies reveals that plan participants across all age groups overwhelmingly want to use their employer-sponsored plan as a consolidation vehicle for their retirement savings, and would take advantage of a program that made the consolidation process easier.
While auto enrollment (participation), auto deferral increases (saving) and target date funds (diversification) have dominated plan sponsor initiatives of late, it’s time to make room on the sponsor’s menu for a new best practice in 2018 – consolidation.