Innovations in automation have helped mitigate many of the factors that are slowing participants’ journey to retirement readiness. Automatic enrollment has helped with non-participation; automatic deferral increase has raised contribution rates; target date funds have given participants an easy solution to diversification over time. And the industry is moving toward a fintech solution to reducing leakage in the form of cash-outs.
The latest problem to be addressed is the missing account phenomenon. In a sense, it is a predictor of cash-out leakage, as many accounts associated with unresponsive owners are either moved to safe harbor IRAs (and subsequently depleted to $0 by fees), or escheated to the state.
Specifically, when participants terminate employment, either through turnover or retirement, many often leave their DC accounts with their former employers. In these cases, they are still participants, though not actively contributing to their accounts. Nonetheless, it is the plan sponsor’s fiduciary responsibility to communicate with them as much and as often as active employees. With automation and electronic delivery of information, that would not seem to be a particularly onerous task. However, if the employer has lost track of the participant’s location, it now has a missing participant. It may not be the fault of the sponsor, but it remains the responsibility of the sponsor to find the participant.
Measuring the Scope of the Problem
Just how big is the missing participant problem? In a study recently completed by Retirement Clearinghouse (RCH), the magnitude of the problem was measured. Specifically, RCH interviewed 2,500 consumers who had ever worked full- or part-time. This group was pared down to 1,000 who had participated in at least one DC plan in the past. Respondents were asked about their past employers’ knowledge of their current address and if they were receiving information about their past DC accounts.
What did RCH learn?
First of all, the data reaffirmed that the U.S. workforce is highly mobile. More than a third (37%) of currently active participants had changed their addresses since starting their current jobs. That is likely to continue or become more pronounced. Other key findings include:
- One in nine (11%) of all terminated account records had a stale address (“missing”), meaning that the past employer holding the account (and responsible for communication) does not have a current U.S. postal address.
- This problem does not cut evenly across employment status, income, generation and balance:
- Employment view: 5.2% of accounts held by a retiree had a stale address, and 22.0% of currently unemployed participants’ account addresses were stale (twice as high as the 11% overall).
- Income view: Low-income households are twice as likely to be missing compared to higher-income households: 18.7% of terminated participant accounts associated with participants with household income below $50,000 did not have a current address on file, compared with 9.1% of accounts of participants with household income above $50,000.
- Age view: Millennials are more likely to be missing: 15.6% of Millennial accounts left with a prior employer plan had a stale address, compared with 8.5% for Gen X stranded accounts and 5.9% of Baby Boomer stranded accounts. Millennial relocations more likely to result in a missing participant record (24%) compared with their Gen X (15%) and Baby Boomer (15%) counterparts.
- Balance view: Almost a third of stranded accounts, 31%, are less than $10,000. Of the stranded accounts left behind that are less than $10,000, 63% belong to Millennials — 41% of Millennials’ stranded accounts are less than $10,000.
- One out of every five (20%) job changer relocations results in a missing participant record.
- The average number of accounts still with a previous employer (stranded accounts) was 1.42 accounts per participant. Retired and unemployed participants had 1.24 and 1.25 accounts per participant, respectively.
- The probability of locating a missing participant with an active participant address record is 67%.
- Active participant address records are reliable at least 93% of the time.
- Only 9% of participants in survey would not verify their address if asked by a former employer.
Interestingly, there may even be a problem with awareness of past accounts. One-third (33%) of participants surveyed said they learned of at least one past retirement account with a previous employer they didn’t realize they had. Half (50%) of Millennials in the survey learned of a retirement account with a previous employer they didn’t realize they had. Even if the survey results were off by half, that is still astounding.
The Search for a Solution
What can be done to solve the missing participant problem? It is obvious that by virtue of the sheer number of participants involved that a fintech approach is necessary. When asked how they would prefer to search for missing accounts, a significant majority of participants — 60% — would prefer an automated process to update addresses (39%) or consolidate their previous employer retirement accounts in their active plan (21%). One-quarter (23%) would utilize a lost-and-found database to find stranded accounts. The remaining 18% said they would rather rely on themselves to update their past employers on their whereabouts.
To dig deeper, I interviewed Spencer Williams, CEO of Retirement Clearinghouse, about his view of a viable solution.
WJC: Spencer, why is this becoming a bigger and more important problem to solve?
SW: The twin issues of missing participants and small accounts have been amplified by today’s highly mobile workforce, and the fact that participants frequently forget to update their contact details with past employers and plan recordkeepers. These trends have been the norm for some time, but the problem of missing participants has taken on a new sense of urgency in light of widespread reports that the Department of Labor is focusing heavily on missing participants when auditing plan sponsors and recordkeepers.
WJC: Does it matter where the lapse occurs in terms of whom is responsible if a plan sponsor is not in compliance?
SW: Where the breakdown in communication occurs is actually irrelevant. Even if the terminated employee fails to update the plan sponsor of their current address, failure to comply falls on the plan sponsor.
WJC: How would you approach the problem?
SW: There is a solution emerging that will help plan sponsors locate missing participants, and its potential is found in the systems of the recordkeepers that sponsors already use to administer their plans. According to new research, current, reliable addresses for up to two-thirds (67%) of terminated/inactive accounts can be found by matching active participant account records against terminated/inactive records across recordkeeping systems; we call the solution “Auto Locate.”
The technology at the heart of Auto Locate creates links between recordkeeping systems, which establishes a “virtual database” of all participant records — an untapped resource for locating the bulk of missing participants. The underlying technology is also fully automated, highly secure, and in service today.
Public Sector Activity
A good indicator of how the importance of this problem is growing is the response from the public sector. In addition to the private-sector RCH solution, there have been two government reactions:
- The PBGC is expanding its Missing Participants Program to terminated 401(k) and other plans in an effort to connect more people to their retirement savings.
- On Capitol Hill, Sen. Elizabeth Warren (D-MA) and Sen. Steve Daines (R-MT) co-sponsored in the 114th Congress the “Retirement Savings Lost and Found Act of 2016,” which would create a national lost-and-found for retirement accounts. It would use data that employers are already required to report to the Treasury Department to create a national, online, lost-and-found for Americans’ retirement accounts.
Clearly this is a problem that needs to be addressed by either the private of public sector, or both in collaboration. Not only are there billions of retirement savings dollars at stake, there is a compliance issue on which plan sponsors are going to need advisors’ guidance.
Warren Cormier is the Executive Director of the DCIIA Retirement Research Center and President and CEO of Boston Research Technologies. He is the author of the DCP suite of satisfaction and loyalty studies, and cofounded the Rand Behavioral Finance Forum with Dr. Shlomo Bernartzi. This column originally appeared in the Spring issue of NAPA Net the Magazine.