What the DOL’s fiduciary rule doesn’t say
The Department of Labor’s much-anticipated fiduciary rule is ushering in many changes across the retirement services landscape, and the new rules governing the “what, how and why” for advice at the time of a participant’s job change will undoubtedly transform the rollover-to-IRA market. However, a closer reading of the fiduciary rule sends a clear, if unstated, signal to plan sponsors, financial advisers and recordkeepers: Absent a compelling reason to roll over to an IRA, keep participants invested in a qualified defined contribution plan throughout their working lives.
Why would the Department of Labor send such a signal? For starters, qualified plans are already subject to fiduciary standards and regulatory protection under ERISA, which has been in effect for more than 40 years. These standards include an obligation to negotiate fees (lower fees achieved through group pricing is a widely recognized benefit), regularly review investment options, routinely communicate plan provisions and changes, and, in all respects, act in the best interests of the plan’s participants. The DOL’s goal of extending these types of protections to participants who roll over to an IRA is commendable. But sponsors can keep participants from having to worry about whether the advice they receive related to rollovers is in their best interest simply by enabling them to stay in qualified plans to begin with.
Upon separation from employment, participants are faced with four distribution options: Leave balances behind in the prior-employer plan, roll the balance over to an IRA, roll the balance over to their new-employer plan, or cash out. With the advent of the fiduciary rule, the DOL is clearly indicating that participants should receive objective, conflict-free guidance. Any specific recommendation given to the participant is now deemed a fiduciary act.
In many instances, keeping participants’ savings in the qualified plan system — either in the prior-employer plan or in their new plan — is the best option for them. As has been shown through experience, participants have the highest probability of saving for a financially secure retirement if they stay invested in qualified plans until they retire, never cash out their savings, and consolidate their accounts as they move between employers. Sponsors can make this objective much easier for participants by providing unbiased participant transition management assistance at the point of job change, and by actively encouraging and assisting with plan-to-plan portability for new, current and former participants.
In the current environment, DIY plan-to-plan portability is a manual, complex and time-consuming process, which leads too many participants to leave their 401(k) balances behind when they change jobs (or worse, cash out) because it’s the easiest choice. A groundbreaking Boston Research Technologies study on mobile workforce behaviors, published last year, found that 32.8% of participants left their savings behind in their most recent former-employer plan when they changed jobs. The most frequent reason cited for this decision was that the participants felt rolling their accounts into their current-employer plans would take too much time.
However, the Boston Research Technologies study also found that the majority of millennials, Generation-Xers and baby boomers would roll their 401(k) accounts into their current-employer plans if the employer paid for it, and even more of them would roll in their IRAs if the employer paid for that as well. Fortunately for sponsors, the Plan Sponsor Council of America reported in its industry survey published this past January that 97.6% of defined contribution plans can accept roll-ins from other plans.
Actively facilitating 401(k) account consolidation in current-employer plans is in participants’ best interest. The average worker changes jobs at least 7.4 times over the course of 40 years, according to the Employee Benefit Research Institute. Using this EBRI finding, we have calculated that if a worker changes jobs and leaves behind a 401(k) account for the first time at age 25, and repeats seven times by age 65, they will have lost more than $30,000 in administrative fees on multiple accounts.
Furthermore, the New England Pension Consultants annual study for 2014 reported that the median recordkeeping fee for defined contribution plan participants was $70. If we build on this finding, a hypothetical 30-year-old who changes jobs today and leaves behind their 401(k) balance in their former-employer plan would end up paying $2,520 in fees on that account by age 65. The worker would also lose future earnings from compound interest on the $2,520 in fees, leading to a total loss of $6,708.54 on that account by age 65 (assuming the account experiences 5% growth per year).
Given that a single unconsolidated 401(k) account during a participant’s working life can deplete over $6,700 from a participant’s savings, sponsors that actively promote and facilitate seamless plan-to-plan portability are acting in the best interest of all participants. This is in line with the DOL’s fiduciary rule, which aligns regulatory intent with the best interest of the millions of participants that change jobs every year — keeping workers invested in the qualified defined contribution plan system.