In January, Alight Solutions released 2020 Hot Topics in
Retirement & Financial Wellbeing, a survey of 130 plan sponsors employing
5.5 million workers. It highlighted key trends among plan sponsors, including
expanding financial wellbeing programs, increasing efforts to help participants
bridge the gap between working and retiring, and strengthening programs to
locate missing participants.
Just as the trends identified in the Alight survey were
influenced by initiatives committed to in the fourth quarter of last year,
sponsors are now applying finishing touches to 2021 tactical initiatives that
will help drive improvements to their plans and boost the retirement outcomes
for plan participants.
Here are three 2021 resolutions that we believe fit nicely
with the trends identified in the Alight survey.
Resolution No. 1: End automatic cash-outs
Sponsors are permitted to automatically cash out accounts
with less than $1,000 which have been left behind by former participants, and
most do so—almost 90% of plan sponsors have a policy to cash out
terminated-participant balances which are below $1,000, according to the latest
Plan Sponsor Council of America (PSCA) Annual Survey of Profit-Sharing and 401k
Plans.
While permitted, the practice sends a very bad message. Sponsors
have an obligation as fiduciaries to make decisions that are in participants’
best interests, and automatically cashing out small, stranded accounts
seriously harms the retirement prospects for the holders of those
accounts—especially if their contact details are out-of-date, and as a result,
they don’t receive the check or related notices in the mail.
Industry research indicates that, counter to prevailing
practices, participants do care about small accounts they leave behind in
former-employer plans.
In Boston Research Technologies recently-published white
paper, Making the Right Choice the Easiest Choice: Eliminating Friction and
Leaks in America’s Defined Contribution System, 91% of the participants in a
401k plan with a large healthcare provider who received a notice indicating
they could have their safe harbor IRA rolled into their active accounts gave
their consent to the roll-in. They even paid a small fee to have their savings
transported to their active accounts.
In fact, over half of the accounts rolled in were less than
$1,000. These rolled-in IRA accounts were originally funded through a mandatory
distribution from a former-employer plan, rather than automatically cashed out
by the healthcare services provider’s plan.
The study demonstrates that, when given an easy way to do
so, participants would prefer to keep these balances in the retirement system
moving forward with them as they change jobs.
Resolution No. 2: Offer assisted roll-ins in financial
wellness programs
With industry research showing pent-up demand among
participants for a comprehensive roll-in solution for their prior employer 401k
accounts, sponsors should fulfill their fiduciary duty by offering
consolidation/roll-in assistance as part of their financial wellness programs,
particularly for new hires.
A groundbreaking May 2015 study by Warren Cormier,
Portability and the Mobile Workforce, indicated an overwhelming interest by
participants in an assisted roll-in program, where 93% of the survey
respondents viewed an assisted roll-in program as a good or excellent benefit.
Besides representing a great benefit to participants, a
resolution to offer roll-ins is easy for sponsors to implement. According to the PSCA Annual Survey
referenced earlier, 97.2% of defined contribution plans already allow roll-ins
from other plans.
With the vast majority of sponsors not having to make any
changes to their plans in order to offer roll-in assistance, all they must do
is to actively promote their plans as desirable destinations for consolidated
retirement savings—calling attention to the investment options and other
benefits that they and their record-keepers can provide participants.
Financial wellness is tough to measure, but the results of a
roll-in program are easy to quantify—and use as a concrete metric to play up
the performance and health of a plan for participants and the retirement
services industry. Sponsors that need help with processing and managing
roll-ins or who wish to improve their roll-in program results can choose to
engage a roll-in service provider.
Resolution No. 3: Pilot a distribution assistance program
The flip side of a roll-in program is a facilitated roll-out
program.
When changing jobs, participants typically receive a
termination notice outlining their options for the retirement account (leave it
in the plan, cash out, roll it to an IRA, roll it to a new employer plan),
often accompanied by a distribution form.
Most participants take the easiest paths—cashing out or
leaving the balance behind—as neither decision involves the headache of processing
contribution forms for an IRA or the new employer plan.
Unfortunately, cashing out wreaks havoc on retirement
outcomes, while leaving balances behind involves the headache of keeping
address information up to date—many don’t, driving the missing participant
fiduciary problem for the plan sponsor.
One solution is to provide newly terminated participants
access to an independent fiduciary to help them with the fiduciary decision.
Add to that a transaction program that allows the participant to easily
implement the decision. That combination can be implemented at no cost to the
sponsor, very little cost to the participant, and will mitigate fiduciary risk
by reducing missing participants and lowering cashouts.
Finally, a facilitated roll-out program can assist
participants who are at or near retirement with the transition to retirement
income, by offering annuity purchase options.
Such a distribution assistance program can be easily
implemented on a pilot basis.
Make 2021 better by facilitating portability
Initiatives that facilitate portability are the hot new
trend for plan sponsors, since they not only reduce fiduciary risk but make
significant, quantifiable contributions to employee financial wellness programs
by preserving retirement savings.
As the old saying goes, there’s always room for
improvement. This is true for plan
sponsors as well as individuals, and these small but eminently do-able
resolutions will yield huge benefits for both in 2021.
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