Commentary: A recent research study authored by Warren Cormier, CEO of Boston Research Technologies, revealed that a large majority of plan participants are receptive to consolidating their retirement savings accounts in their current plans.
When asked if they would take advantage of a sponsor-provided roll-in service to help with the consolidation process, 83% of millennials, 83% of Generation Xers and 78% of baby boomers responded affirmatively if the plan paid for it. Furthermore, the study found that even more participants — 91% of millennials, 89% of Gen-Xers and 65% of baby boomers — would likely roll IRA balances into the plan.
The main objective of offering assistance with account consolidation is to help participants avoid the costly mistakes they routinely make — cashing out and stranding accounts in former employer plans. Proactively providing services to avoid these mistakes benefits both sponsors and participants.
For sponsors, reductions in cash-outs and stranded accounts increase their plans’ average account balances, a key industry metric for measuring success, and simultaneously cut plan fees (see previous blog post). This second advantage —fee reduction— was documented in a study undertaken by Deloitte Consulting in cooperation with the Investment Company Institute, which found that a 10% increase in a plan’s average account balance can decrease a sponsor’s “all-in fee” (the combination of administrative, investment management and recordkeeping fees as a percentage of plan assets) by 2.2 basis points.
Facilitating consolidation and discouraging cash-outs also increase participants’ retirement savings over the long term, a goal that aligns with every sponsor’s fiduciary duty to act in the best interests of participants.
Since most plan participants are open to consolidating their retirement accounts in their current plans, and 98.4% of 401(k) plans are already capable of accepting roll-ins from other plans (according to the Plan Sponsor Council of America’s November 2013 survey), the battle to reduce plan expenses while improving plan metrics and participants’ retirement readiness is nearly won. The final step for sponsors is to hire a roll-in service provider to actively counsel new and current participants against cashing out, and help them consolidate all their retirement savings in their present plan.
What to look for in a provider
When choosing a roll-in service provider, check to see if the firm operates a domestic call center and requires participants to speak with service advisers by phone before cashing out or making other significant changes to their accounts. This ensures that participants receive guidance about the consequences of cashing out, and learn why consolidation is a better option.
Coaching plan participants into making better decisions is as much art as it is science. Plan participants shouldn’t be thought of as a homogenous group — they consist of men and women from all walks of life and from multiple generations. Depending on these demographics, participants have varying levels of awareness about distribution options for their retirement accounts.
The Boston Research Technologies study found that male participants knew more about what they could do with their retirement accounts than their female counterparts at the time of their last job change — 65% of women participants said they were aware of their 401(k) distribution options, compared to 77% of men. This difference alone demonstrates the need for robust counseling and guidance for participants who are in the process of making critical decisions that will affect their retirement readiness.
Partnering with a roll-in service provider that requires a participant to speak to an adviser before taking any action gives all participants an opportunity to make well-informed decisions about their retirement savings.
Trust, but verify
For sponsors, proper due diligence on a roll-in service provider doesn’t end when the agreement is signed. Remember, complacency is your enemy — keep tabs on what the provider is telling participants.
If a sponsor’s provider demonstrates a bias toward one outcome or another, then the sponsor has opened itself up to significant fiduciary liability. Sponsors need to be able to verify that their service providers are a seamless extension of their responsibility to act in the best interests of participants. Periodic review of the interactions between your service provider and your plan’s participants — even going so far as to listen to taped conversations — tops the list of prudent practices.
“If you build it …”
To paraphrase the message Kevin Costner’s character received in the film Field of Dreams, if you build an infrastructure for roll-in and rollover assistance, participants will come.
Participants overwhelmingly indicate that they want help with account consolidation — and would use roll-in services if sponsors offered and/or paid for them. So take the final step and respond to the demand. You have nothing to lose and everything to gain (for your plans as well as their participants).
Spencer Williams is president and CEO of Retirement Clearinghouse.
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