PLANSPONSOR - August/September 2018 - 2

Insights
Making the Most of Savings
W
hen it was first becoming popular to show retirement
plan balances as annual income on participant websites
and statements, I asked a well-known behavioral
economist how we could improve those figures by helping
participants aggregate assets at their current employer. I was
really struck by his curt answer: " No one has any other assets. "
In dismissing my question, the economist was, I thought,
taking the easy way out. Median job tenure is approximately five
years-and has generally hovered around
that figure for more than 30 years-which
means it is not illogical to think someone
could have had six to eight jobs over the
course of his working career. Considering
that only 50% of workers are enrolled in a
retirement plan, you could then figure that
this hypothetical worker had access to only
four plans and, if the average participation
rate is close to 75%, that he participated
in three. And that's being conservative. If
he accumulated any money in those three
plans, he had some assets worth noting-
unlike what the economist said.
In fact, thanks to provisions enacted
under the Economic Growth and Tax
Reconciliation Relief Act of 2001 (EGTRRA), participants with
between $1,000 and $5,000 saved can't be cashed out automatically
but are rolled, automatically, into a Safe Harbor IRA [individual
retirement account]. The challenge the behavioral economist
ignored in that trite answer to my question was how to
keep those assets qualified and how to improve that retirement
income figure in the website/statement simulation.
We know the assets are out there-whether in these IRAs or
left at a prior plan. In fact, a plan sponsor who had just done an
evaluation of her plan with her recordkeeper recently told me she
was surprised by one statistic that hadn't impressed her before.
Of her plan participants, approximately 30% were not active
employees. The plan already had the practice of immediately
rolling the accounts of eligible participants into an IRA, so those
inactive employees each had $5,000 in her plan.
That's just one example, but it's representative of a much
bigger issue for the industry-both what happens to the accounts
automatically transferred to an IRA and plan sponsors' administrative
responsibilities for non-employee participants. A U.S.
Government Accountability Office (GAO) report found that the
nation's retirement system loses $74 billion in assets every year,
with 89% of that due to cash-outs. Further, the Employee Benefit
2 PLANSPONSOR.com August-September 2018
Research Institute (EBRI) determined that, due to automatic
enrollment, there are a plethora of small retirement accounts;
in 2012, 40% of retirement plan accounts had balances under
$10,000. That's six years ago-it's almost certainly larger now.
Last year, EBRI estimated that if Americans were able to
effortlessly, automatically roll their 401(k) balance over to a new
employer each time they switched jobs, they would have, collectively,
$2 trillion more in retirement savings by age 65.
EBRI's research also found that if
Is your plan
designed
to allow for
employees to roll
in their assets
from a former
plan?
all participants with less than $5,000
in one or more retirement accounts had
these automatically rolled over to a new
employer, they would have an additional
$1.5 trillion in retirement savings by 65.
This would reduce the retirement deficit
for those 35 through 39 by 20%. Because of
their long savings horizon, Americans 25
through 34 would experience the largest
increase in savings, particularly those in
the lowest income bracket.
Work is being done to help achieve
those results in the area of automatic
portability. In 2016, the Bipartisan Policy
Center's Commission on Retirement
Security and Personal Savings recommended that the nation
create a private-sector retirement security clearinghouse that
could handle auto-portability, and there are companies working
on solutions to help plan sponsors address this, now.
There are also simple steps that plan sponsors can take to
help participants with this issue-and that can also help the
sponsor by increasing plan assets, which, in turn, can help lower
pricing, later, on both a recordkeeping and investment level.
According to Spencer Williams, CEO of Retirement
Clearinghouse, the probability of participants cashing out their
retirement plans or their Safe Harbor IRAs drops from 90% to
30% when the account balance surpasses $20,000. Most of your
new hires have held jobs before and, therefore, likely have some
assets out there. Recognizing this and helping them aggregate
those assets and maintain tax-qualified savings should be near
the top of your priority list, alongside the recent industry focus
on financial wellness and debt management.
So, I'd ask you, as a plan sponsor, to consider two things:
First, is your plan designed to allow for employees to roll in their
assets from a former plan? And, second, when onboarding new
employees are you letting them know about this option?
-Alison Cooke Mintzer, Editor-in-Chief
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PLANSPONSOR - August/September 2018

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