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READER POLL: Are Plan Sponsors Looking at Leakage?

Industry Trends and Research

A surprising amount of retirement savings turns into pre-retirement spending (and taxes) for no reason other than the complexity of the rollover process. This week, we asked NAPA-Net readers to weigh in.

We got a lot of responses this week (that’s what happens when a free registration to the 2020 NAPA 401(k) Summit is on the line)! Nearly all (95%) of respondents had worked with participants on rolling out a distribution, and roughly as many (94%) had worked with participants looking to roll in a prior distribution to their new plan.

“It is a very arduous and terrible experience both for me and the participant,” explained one reader.

“It can be a complex, manual process that requires significant form completion and coordination,” noted another. 

“We generally have found that we have little influence to affect WHAT they do with those distributions,” explained one reader. “Participants generally have a predetermined idea of whether they are cashing out, rolling to an IRA, or rolling to another employer plan.”

“In today’s world this way too much paperwork and way too many steps,” noted another. “Many employees who want to rollover initially start thinking about all the glorious things they could do with that money while waiting for the long process. Many make last minute sporadic decisions to cash out. Impulsive actions that overtake the responsible decisions made while a planner or human resource professional sat with them.”

“To understand the complexity of the plan to plan rollover process, here's a partial list of issues that can arise: • What if there is Roth money and the new plan doesn’t allow Roth? • What if there are after-tax employee contributions and the new plan doesn’t allow? • What if there are outstanding loans? • What if the new plan has a waiting period before new hires can roll in money? • What if the participant is at or over RMD age? • What if the transfer is from other than a 401(k) plan, e.g., DB or 403b? • What if spousal consent/notarization is required?”

 “Accomplishing this task can be exceedingly complex – some would say painful. Every recordkeeper has different forms and requirements, often using language that is complex to the average American. Moreover, people have to complete the requirements of BOTH the distributing plan and the receiving plan..

“The process is all over the board with what's required. Even if the process was standardized from record keeper to record keeper it would be a major improvement.”

“It depends upon the recordkeeper as some have white glove service on assisting with rollovers and others not.”

 “As an advisor, the TPA/Recordkeeping partner on the plan plays a HUGE impact on the outcomes of this process,” said one reader. “If the process is made simple and understandable for the participant, there is much less chance of leakage.” Another explained, “Sadly, the added safeguard of a TPA (to review vesting or eligibility) delays the process. The recordkeepers who have strong online tools for TPAs, are best to work with, as they can get TPA review and then provide electronic rollover capability (Vs hardcopy check) to new 401(k) or IRA.” 

Or, as one reader more succinctly noted, “The process always depends on the recordkeeper. Some are better than others."

It was a theme that was echoed repeatedly:

“Recordkeepers who are trying to gain assets have innovated the most and provide best service support to participants doing rollovers,” noted one reader, who went on to explain: “My best experience to this end, was working with a client, who had acquired a division of another employer. That employer had the same recordkeeper. The online rollover team was able to get onto the phone with the participant and do a verbal rollover of his account from the prior plan to his new plan in 15 minutes. It was awesome. In direct contract, we had another client, who acquired a company in an asset sale, and conveniently (we thought) both companies had the same recordkeeper. A majority of employees wanted to rollover their plan assets to the new company plan. In a befuddling lack of ability, the recordkeeper could not even do a bulk rollover process, but rather required individual rollover forms be completed and submitted for each rollover. Since there were 200 employees acquired, and easily a super majority wanted to rollover, this was a nightmare situation. In fact, it wasn't until the local relationship manager, stepped in to offer bundling the forms (from her office) for batch processing, that employees’ accounts were transferred. Needless to say, once the rollovers were completed, the recordkeeper was replaced.”

Many readers noted how much the process has improved – particularly among certain recordkeepers. And yet, there were a number of horror stories:

“It takes a HUGE chunk of my time,” explained another. “I MUST get on the phone with the participant and the prior recordkeeper to help facilitate a call, ask for all the important information (fees, amount of Roth contributions/earnings and date of first Roth contribution) and give the new plan payable, plan name, number, and mailing address. I prep the rollover acceptance form and send it for signature. It’s a ridiculous amount of effort and time. Especially, when the amount of assets is usually under $10,000…often about $2,000.”

“It’s brutal. We hunt down the previous employer’s distribution paperwork for the participant, which is the biggest barrier to rollovers into a plan. Another huge problem is that moving a traditional IRA into a 401k plan is very problematic logistically. 401k custodians do not have paperwork that requests a transfer of assets (or “pulls” money, like you’d see in the IRA world). IRA custodians do not have paperwork that distributes assets to a new custodian (or “pushes” money, like you’d see in the 401k world). We generally have to create our own Letters of Authorization that a plan trustee and participant have to sign, which is insane in 2019.”

“This process is less than seamless but it really helps people so they can monitor one account rather than 3-4 (on average),” noted another.

Leakage Versus Debt?

While leakage looms large as an industry concern, we asked readers where it stood on the agendas of plan sponsors compared to – student debt.

Well, as you might expect, the impact of college debt on retirement savings loomed larger – half of the respondents (52%) cited it as a plan sponsor concern, compared to 45% for leakage from losing existing retirement plan balances and just a third (33%) concerned about helping new employees roll their savings into their new plan. That said, a number of readers expressed skepticism that plan sponsors were all that focused on ANY of those items. “Most plan sponsors are concerned with compliance and prudent processes versus leakage,” noted one.

"I don't think they even think about it until we mention it during our plan reviews." 

“I don't think any of the three are particularly concerning to plan sponsors. College debt is an issue however,” said another. “None of the above. Once the person leaves, they want the separation to be complete and would prefer to have them out of the plan so that they have no future liability or obligation. As to new employees, we bring it up but the employer never does. They don't think of it and it may extend their fiduciary liability,” explained another reader.

“Really none of the above. Employers are focused on recruiting and retention in an extremely tight labor market. Overall cost of living (college debt only factors in with those focused on millennial workforce) is concern relative to "affording" to save. Employers are not concerned with leakage; they don't know the term... Recordkeepers/asset gatherers are driving rollovers into a plan for assets under management scale. We do have some interest by employer to better enable participants to understand how to aggregate their multiple account balances for assessing retirement readiness. To this end, the easier rollovers are, the better.”

“I have more and more plan sponsors asking about providing something through their retirement plan to help employees pay down student debt. Personally, I'm very concerned about leakage because workers are changing jobs at a higher rate than ever before. They will never be prepared for retirement if they keep starting over with each new job.”

“It appears plan sponsors of late have been more concerned with attracting and retaining employees and the impact of college debt in doing so. Although plan sponsors may know their plan allows for rollovers into the plan (if the plan doc does allow rollovers in), it is not necessarily on their radar during orientations or when participants are actually enrolled in the plan. The topic of rollovers usually becomes known to the employee through either a group meeting or a one on one meeting where the details of their plan are discussed or randomly because the question is raised, ‘What do I do with my old plan?’”

“No one I work with comes out and states that they are concerned about this (or any of the above subjects). If solicited, they might express concern, but it's a very low-level concern.”

That said, asked to rank those concerns – well, college debt impact still loomed largest; 40% of this week’s respondents indicated that was the area plan sponsors were most concerned about, though 30% were most concerned about rollouts, and 26% citing roll-ins.

However, as one reader explained, “All three are important to plan sponsors as we continue to implement financial Wellness.”

Consolidation Interest  

We then asked readers if their plan sponsor clients would be interested in participating in a program that automatically consolidated their participants defined contribution plan balances into their plan at the time of their hiring – and readers responded…

48% - Yes, most would.

25% - Yes, but only some.

11% - Not sure.

9% - Yes, all would be interested.

7% - No/not really/not yet.

We got a lot of reader comments on this particular item – here’s a sample:

Universal portability and a system to make it happen would be welcome.

It's always mentioned to employees when meeting with them but not sure our clients are even thinking about it.

Forget what the plan sponsor thinks, I LOVE this idea.

I'm not sure how much that would move the dial for a plan sponsor (maybe), but I'm positive that participants would like it... and of course advisors would love it.

While consolidation makes sense most of the time, certain things need to be considered such as total cost of investing. For example, if a client is coming from the TSP, we suggest it stays there as that cost structure is essentially free.

I would want to see how it works before presenting the solution to a client.

Absolutely. The regret is very Real for those employees who take a distribution.

With the aggregation of assets over time, it would help employers have a more impactful role in helping employees see the full picture of their retirement readiness. The visibility of one account that aggregates balances from prior plans should also benefit the current employer from employees feeling more financially ready for retirement.

This would be an awesome benefit for everyone.

We have some clients who encourage rollover in to the plan and others who don't.

Yes, with Safe Harbors for the fiduciaries. Would a participant have to roll their balance in to a more expensive plan if their new employers plan was more expensive? Who would evaluate the expenses and make that determination?

Some employers do NOT want to get involved in forcing personal decisions. If the employee expresses an interest and they have a solution then they would go ahead with the recommendation.

Would be very interested in tool that can aggregate, but not force the rollover/consolidation.

There'd be a concern that some participants wouldn’t want the rollover to go to their new employer's plan.

This needs to be adopted!

I believe most plan clients would be interested in such a program. To be honest, I've not done my own due diligence.

Would need to learn more. The main issue would be fees, would the plan where the employee formerly worked be a better option? Moving a participant to a higher fee plan with less options would not be something we are interested in doing.

If such a program actually worked, yes, but such programs require extensive recordkeeper cooperation, and there is no evidence of cooperation that I have seen on that level.

I believe most of our plan sponsors would be open to understanding the benefits and how that program would work.

Many could benefit from this, but not yet "most."

As long as it is a convenient, easy and streamlined program, I think they would be interested in learning about it.

Based on the conversations I've had, I would say all would be interested but just to be safe let's say most. Plans sponsors generally would like to cut cost across plan expenses and realize more plan assets generally helps accomplish this.

Program ‘Notes’

Of course, while universal portability isn’t yet in place, we also asked readers if they knew that such a program had received approval of a request for relief from ERISA’s prohibited transaction restrictions to receive fees in relation to its pioneering auto-portability program from the Labor Department? 

39% - No.

30% - Yes.

25% - Vaguely.

6% - Not sure.

If you missed that announcement, you may also have missed the news that the Labor Department has requested comments on the auto-portability concept (see DOL Seeks Input on Auto Portability).

We then asked readers if the defined contribution /401(k) plan participant balances with a prior employer could be automatically transferred in to your client’s plan as they changed jobs:

81% - would introduce that service to a plan

75% - think that plan participants would find it easier to manage their retirement savings

67% - think participants would be less likely to cash out their retirement savings

37% - think participants would feel more confident about converting their retirement savings into retirement income

(More) Reader Comments

Yes, we got a number of wide-ranging comments on this issue – and environment. Here’s a sampling:

With all the banks, brokers, and insurance agents that have their greedy hands out ready to help participants, there is no reason for anyone to say the process is too hard. Leakage is due to a lack of character on the part of participants. I can see why someone with college debt would be hard-pressed to save. It is beyond the scope of this poll to comment on how they got in that position in the first place. There is plenty of blame to go around.

I of course lay out all the options but I personally recommend employees take their accounts with them. Whether they are new to a company or leaving. Providers want to retain, ER don't want the burden of having termed participants, with a slew of opinions in between. As with anything in our industry, we can talk about an issue a thousand different ways to make it more complicated than it needs to be.

Though we read a lot above college debt concerns, we have not had one single client mention it as a problem (perceived or actual) among their employees as it relates to participating in 401(k).

Rolling IN to a plan from a plan is a lot more complicated than rolling into an IRA. Each provider has different procedures for rolling in and rolling out which adds time to the process. Add to that the fact that we need to talk to both providers to understand procedures and it adds about an hour of work for our offices and 1/2 hour of time for our clients.

Let's be real -- a big part of the problem is the recordkeepers making it a complicated process, especially if it's a 403b plan. College debt is a problem, but many companies are looking to payback programs as an option. Many would love for those dollars to be considered for the 401k plan for purposes of matching. Overall, from my experience, it's the same people cash out their retirement accounts when they leave a job. It's the young who don't know better, or the ones that live paycheck to paycheck. Financial literacy will probably go a long way in helping.

Anything that makes it easier for participants to save and invest is a positive! Everyone is lazy.

It all goes back to education and communication and more education to help employees understand that taking pre mature withdrawals are punitive.

Rollover distributions out of the plan seem to be faster than rollovers coming into the plan because a lot of times the other provider requires their own paperwork to be filled out and the time of coordinating between two providers can be burdensome on the client.

Over my 30 years working with plan sponsors and participants, I have learned that auto features work. Individuals do not understand saving for retirement, we pretty much have to put them on a plan for them to execute. Employers have a business to run and just want the retirement plan to run smoothly and not get sued. College debt is a huge issue but we can't solve that in retirement plans alone. We should be part of the solution but we don't have nearly enough assets in our industry to be the sole solution. We have to focus on those younger than 35 to get them on track so this challenge won't be as big for them as they approach retirement. Those over 50 are probably going to have to figure it out for themselves. The ones between 35 and 50 are in a flex group, some great minds could probably figure out a solution for them.

Again- we try and make this process smooth and stay involved from each step of getting the check issued to populating the necessary forms to make sure rollovers are issued and deposited as timely as possible.

I am more concerns about the perception of loans. most participants understand the tax/penalty of a distribution. However very few understand the true impact of loans.

Life is good any day we can help someone focus on their overall financial wellness and getting them on track for their retirement years (or as Charlie Epstein says, "Desirement Years").

Financial concerns are true concerns to most employees. Helping them navigate the system is important as an advisor.

I haven't seen the link between college debt and retirement plan leakage. I see more of additional spending money and with midsize amounts, maybe transportation spending.

Most individuals with smaller balances do not seem to care and simply cash out because of the lengthy process.

Auto-portability is interesting, but I can see lawsuit in future once same named individuals get the wrong rollover amounts, especially if data verification is poor/or duplicated.

I love the idea of consolidating balances, but would need clarification on how the process would work and who would own it.

Life would be easier without tons of different IRA accounts and a streamlined rollover process.

I am in favor of anything that streamlines the rollover process. Most people don't want to cash out their accounts and would prefer to have their balances in one place but with every recordkeeper managing the process differently, it is confusing for participants to know who to call and what to do.

The more streamlined the better.

Biggest ask is for a simple, streamlined, uniform process. The rest is all gravy!

One concern about making it automatic would be if someone was leaving a plan with low costs and started employment (probably at a smaller firm in comparison) with higher costs.

Better option for many participants, is often to compare 401(k) plans, predecessor employer and new employer plans. The predecessor employer plan may be superior, a better choice to consolidate retirement savings.

Most participants do not understand the rollover process and forms necessary to complete the rollover properly. They also do not understand their rollover options upon termination of employment I find when there is a dedicated consolidation specialist assigned to assists participant with rollovers into the plan; this is very effective in increasing plan assets. The plan sponsor has to understand the importance not only to the participant in helping them to do so; but to the overall health of their plan (lower fees, reduced expenses, increased participation and savings rates, participants staying connected to their retirement assets, etc.).

I think the inherent complexity of the process for the average participant creates inertia and the ability for them to make an informed decision.

It does concern me that most employees who leave old retirement plans behind seem to think that they are just too busy to deal with this and also don't like the hassle of having to contact their old HR department once they leave. These are just excuses to me since this is THEIR MONEY and it is for THEIR FUTURE. I know it can be somewhat time-consuming and there is often forms to fill out and signatures needed, however it is important to keep an eye out on these accounts no matter what age or stage you are in life. It's your nest egg and you need to take charge of it! Enough said. (I know I'm preaching to the choir here, but it is a passionate topic to me.)

Clearly, "leakage" is a problem, especially for the under 35 year old crowd I find, who believe (incorrectly) that they can make up that savings in the future given their runway till full retirement. By the process not being automated, it does allow for the thought of "perhaps I should use this money today."

My mother retired a few years ago and was a participant in a 401(k) plan that rolls her entire plan balance into an annuity unless she acted by Dec 5 in the year she turned 71. She responded Dec 13 that she wanted to roll the balance into an IRA. They annuitized it anyway and she needed to jump through hoops to undo it and avoid the annuity. Between the time the company initiated the annuity contract and the time the money arrived in her IRA, the market impact made her $150k+ balance $132k. What a way to lose retirement savings.

Thanks to everyone who participated in this week’s NAPA-Net reader poll!

p.s. we’ll announce the winner of the free 2020 NAPA 401(k) Summit drawing on Monday in next week’s NAPA-Net Reader Poll! Want to weigh in on this week’s poll? It’s still active at