A blueprint for lifetime participation in 401(k) plans
Commentary: How many of us will be so fortunate as to participate in an employer-sponsored retirement plan every day of our working careers? Or, for an even more uncommon scenario, how many of us will work for the same company for 30 or 40 years? Yet, as has been amply established by the Employee Benefit Research Institute, those who can raise their hands and respond “yes” to either of these questions routinely show up in the top decile of savers who are well-prepared for retirement — and these participants provide a clear blueprint for retirement-saving success.
In the spirit of 401(k) Day, celebrated last month, let’s take a moment to reflect on the important role 401(k) plans play in enhancing the economic well-being of America’s mobile workforce — and how we can continue to improve retirement readiness by creating a leading-edge blueprint for lifetime participation in plans.
Only a very small minority of participants is lucky enough to be part of the same company for over 40 years; according to EBRI, the average American will have more than seven jobs before retirement. And while 401(k) participants can legally move their savings forward from one employer to the next, on a practical basis it’s not so simple. In order to move their savings, participants first have to convert all their 401(k) investments to cash, close their account in their former employer’s plan, enroll in their new employer’s plan and, finally, transfer their savings.
Each of these steps requires an understanding of how to do it properly, and a commitment of personal time and energy. The process is cumbersome and largely manual, and the difficulties of DIY 401(k) consolidation most often lead participants, particularly those with small balances, to cash out or simply leave their savings behind in their former employer-sponsored 401(k). Imagine the challenges of preparing for retirement while juggling five, six or seven different accounts.
Plan sponsors, though, can help participants to change this behavior — and pre-empt suboptimal decisions at the same time — by adopting a two-pronged approach: automatically enrolling new participants without a waiting period; and offering a full suite of portability solutions for both their active and terminated participants to move old 401(k) balances into their new plan as quickly as possible. In brief, this approach helps employees seamlessly move their savings into their current plan — whether they are newly hired, long-time active, or recently terminated participants.
Also see: Retirement wealth holding steady
Portability solutions are a proven method for facilitating and actively encouraging participants to keep their hard-earned savings in the retirement system. Portability solutions are also a proven method for stemming leakage and reducing the number of small accounts held by participants in the mobile workforce.
Embracing the roll-In
Embracing the roll-in is the best practice which is at the heart of portability solutions. And while the vast majority of 401(k) plans can accept roll-ins from other plans, roll-ins only benefit participants who know about them and have access to a service provider that will help them through every step of the process. Informing participants with balances of all sizes about roll-ins, and assisting them with account consolidation, counseling them against cashing out when changing jobs, and tracking down holders of stranded accounts can appear daunting, but sponsors shouldn’t fret. Roll-in service providers can work alongside sponsors to handle these tasks, and establish processes to make account consolidation run smoothly for every participant. The resultant flows into plans will improve key plan metrics such as average account balances and participant retirement readiness scores.
Plan sponsors should also be aware that delivering portability solutions for participants with more than $5,000 in their accounts includes the requirement to obtain participant consent for any transactions. For participants with balances of less than $5,000, there is an automated solution to deliver the benefits of portability — chief among them lifetime participation in the retirement system.
Test drive the next auto
Sponsors have the power to unilaterally cash out terminated participant accounts with less than $1,000, and to roll terminated participant accounts with less than $5,000 into safe harbor IRAs. While these practices improve the overall health of 401(k) plans, they also hurt participants and contribute to (rather than plug) leakage.
Instead of adding to an already sizable retirement-savings landfill, sponsors can utilize the roll-in feature that their plans already possess to “recycle” assets and keep them in the retirement system (see previous blog post). The Plan Sponsor Council of America’s November 2013 survey found that 98.4% of 401(k) programs are capable of accepting roll-ins from other plans. By opening up your plan to automatically accept roll-ins from another plan’s mandatory distribution program, while processing your own plan’s mandatory distributions, you enable “auto portability” — reducing the number of small accounts in your plan while maintaining the overall asset level.
Portability solutions for the mobile workforce are a critical — and missing — element of the blueprint for retirement readiness that we observe in the behaviors of the most successful participants. With another 401(k) Day having come and gone, sponsors should take some time to reflect on what they are (or aren’t) doing to facilitate portability and foster lifetime participation in plans.
Spencer Williams is president and CEO of Retirement Clearinghouse.