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 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:
To 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.
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.
Looking Ahead
If things progress as we believe they will, you’ll likely soon see:
Very soon, many more people will be speaking our language!
Topics: Auto Portability, Safe Harbor IRA, Automatic Rollovers, Retirement Plan Portability, Retirement Savings Portability,Automatic Rollover
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