Selling the The 401(k) “Roll-In”

Consolidation to Cure What Ails the Rollover System

by J. Spencer Williams

According to a recent and widely-read General Administration Office report, the 401(k) plan rollover system is, in short, broken, and yet a solution to improve the system is frequently overlooked. The cure is simple: the majority of 401(k) participants, particularly those changing jobs, would benefit from rolling their savings from employer plan to employer plan  carrying their savings with them. This keeps their savings intact, consolidates their accounts, heightens appreciation of their ever-growing nest eggs, and leads to better decision-making, according to the report. But, for reasons discussed below, participants almost never choose this option.

To encourage more account consolidation, the GAO proposes a regulatory fix that includes more information, education and disclosures. While it’s a good start, the retirement plan industry has within its power the ability to take a much quicker and more effective route to realizing this goal. Proven, common sense solutions are at hand.

What’s wrong

Although the benefits of rolling over into a new employer’s plan – or “rolling in” as it has come to be known – would seem to be self-evident, few of the 9.5 million defined contribution plan participants who switch jobs each year choose this option. According to the GAO report, most 401(k) plan participants find the roll-in process to be overwhelmingly confusing, complex and intimidating. This is especially the case for low-balance participants whose meager savings make them less attractive prospects for the financial services firms that provide rollover services.

As a result, many participants forego the roll-in option in favor of:

• cashing out, which is extremely harmful to long-term retirement readiness. There are $74 billion in cashouts at job change annually, representing a significant population of retirement “drop outs.”
• stranding their account in their past employers’ plans, which complicates long-term planning, raises costs and creates risks both for participants, who can lose track of their accounts, and for plan sponsors, who can lose tract of participants.
• rolling over into an IRA, which can be a good option but has become the automatic default at the expense of other options.

These ill-considered choices are repeated continuously throughout a participant’s work life; an average employee will change jobs 7.4 times in a 40-year career. In short, the complexities of the roll-in process discourage participants from pursuing potentially better outcomes.

What’s right

But it doesn’t have to be that way — and it isn’t at a small handful of leading employers who have recognized and solved the problem to the benefit of all parties in the system. The secret to their approach: the provision of personalized assistance to participants at the point of job change so that they can make the decision that’s right for them, while avoiding cashouts and stranded accounts.

These employers use a brand-neutral provider with licensed specialists to help participants entering a plan to understand their options and – this is critically important – to help participants obtain, fill out and process paperwork to complete their chosen decision. With a knowledgeable specialist to assist them and, if necessary, intervene with past and present employers and recordkeepers on their behalf, participants are much more likely to choose to an option that makes sense but had seemed impossible to execute.

There’s no denying that participants need help. According to DCP 2013, an annual plan sponsor satisfaction and market dynamics study that has become the standard for service quality and trend measurement in the 401(k) arena, 48 percent of job changers who moved money out of their previous defined contribution accounts needed assistance to do so. Without help, participants tend to cash out. The DCP study found that 60 percent of participants who did so now have “major regrets.”

However, when provided a roll-in option, a significant percentage of participants choose it, and express an extremely high level of satisfaction in subsequent surveys. Boston Research Group, one of the leading research firms in the retirement plan industry and author of the annual DCP report, recently released a study of a roll-in program instituted by one of the country’s largest employers, a health care concern with more than 200,000 participants and an average employee turnover of 50,000 each year.(http://www.bostonresearch.com/whitepaper.pdf ).

While space does not allow for an in-depth recounting of all of the report’s findings, it is important to note that the employer’s roll-in program has proven to be extremely effective and has cut cashouts in half, increased plan assets, and saved an estimated $6 million in plan costs.

What’s in it for you

The roll-in solution, which enables account consolidation, holds promise for each of the players in the retirement plan industry:

Participants can:

• reduce fees and simplify retirement account management through consolidation of accounts.
• receive unbiased guidance regardless of account balance to prevent retirement dropout at the time of job change. (Studies show that when participants amass approximately $15,000 to $20,000 in savings, they become more committed to saving for retirement and preserving their nest eggs).

Sponsors can:

• support fiduciary responsibilities of the plan.
• increase plan assets and average account balances.
• protect the benefit spend and reduce cashouts by changing participant behavior.
• minimize cost and headaches for mandatory distributions, lost/missing participants & uncashed checks.
• increase participant engagement with a distinctive new benefit.

Plan advisors can:

• help their sponsor clients reduce plan costs and enhance plan services. By reducing the number of stranded accounts alone, it is estimated that plan sponsors could save $48 billion in plan costs.
• The industry as a whole can: • Increase the assets it manages. By cutting the rate of cashouts in half, the retirement plan industry can keep $1 trillion in the retirement system that would otherwise “leak out” over the next 10 years, according to estimates by the Employee Benefit Research Institute.

What’s next

The beauty of the roll-in solution is that it can be executed today, without costly or time-consuming regulatory or legislative action. It’s simply a matter of industry initiative. Fortunately, a growing number of industry leaders are warming to the idea. Last year, David Wray, of the Profit Sharing Council of America (PSCA), endorsed the idea of account consolidation upon job change, noting that all parties in the system would benefit from making the process easier to complete. More recently, a committee of the Defined Contribution Institutional Investment Association began examining roll-ins, their advantages, and the steps the industry might take to promote them.

More discussion and work needs to take place, but there is a clear and growing momentum for the adoption of practices that make roll-ins a more realistic option for participants to choose. In this case, common sense is winning the day, as more and more people recognize the potential for better outcomes if the system were to change.

The GAO report shines a light on important issues within the 401(k) system, and we agree that making plan-to-plan rollovers easier is critically important. But the GAO’s suggested remedy — to provide more information and disclosures — while a good start, falls short of the comprehensive actions needed, specifically enhanced systems and personalized support and guidance. People must have expert hand-holding throughout this process or they will continue to be discouraged by complexity and continue to make choices that compromise their retirement security.