PLANSPONSOR - October/November 2018 - 22

Upfront
Missing
Participants
Fare Better
Than Those
Cashing Out
FINDING missing
participants
has
become a focus of retirement plan
sponsors, due to enforcement actions by
the Department of Labor (DOL)-with
some sponsors, in fact, calling these
actions unfair, as no clear guidance is
available for what the employer should
do. Yet, a bigger problem for helping
participants preserve their savings is
cash-outs on termination.
An auto-portability simulation
performed by Retirement Clearinghouse
(RCH) in 2016 shows that, in just over the
next 30 years, total cash-outs could reach
$282 billion, and rollovers to other qualified
plans would be only $14.7 billion
among 8.4 million participants.
Tom Hawkins, vice president of sales
and marketing at RCH, points out that
missing participants have preserved their
retirement savings, while participants
cashing out have not. An RCH simulation
shows that preserving a $5,000
retirement savings balance can result in
$70,000 of savings at retirement.
According to Hawkins, participants
who cash out of a defined contribution
(DC) plan " effectively 'drop out' of the
defined contribution system, as if they'd
never enrolled. They may also be squandering
their employer's matching contributions, "
if that option is part of their plan.
Under the Employee Retirement
Income Security Act (ERISA), DC plan
sponsors may automatically force out
participant account balances less than
$5,000 if the participant does not take it.
For accounts of $1,000 through $5,000,
the money must be placed in a safe harbor
individual retirement account (IRA).
Referring to data from an RCH
automatic portability simulation, as well
as findings from a missing participant
survey the firm performed jointly with
Boston Research Technologies (BRT), far
more cash-outs occur than participants go
missing. Each year, 14.8 million participants
will change jobs. Of these, 6 million
will eventually cash out-41% of the total.
By comparison, only 1 million participants
will remain in their former employer's
plan, or 14.5% of the total. Of these,
about 243,000, 11.3%, will have unusable
addresses and be considered missing.
Hawkins says that most 401(k) cashouts
are avoidable. He cites a study done
by his firm and BRT in 2015, " Portability
and the Mobile Workforce, " which interviewed
5,000 retirement plan participants
and found, of all those who cashed out
their retirement plan balances, only 37%
had done so to meet a true financial emergency.
Of the lesser reasons cited, he says,
22 PLANSPONSOR.com October-November 2018 Art by David Huang
one was that the rollover experience was
difficult and the participants had not been
educated about a cash-out's high cost.
For participants opting to roll over
their savings, Retirement Clearinghouse
offers an automatic portability solution,
which uses the demographic data from
that rollover, sends it to the new recordkeeper,
and if a match in its system
is found, automatically rolls over the
employee's IRA to his new plan.
Hawkins observes that the problem
of missing participants is a pain point for
plan sponsors, because it presents a longterm
liability for the plan, adds to costs
and incurs a fiduciary risk and pressure
from the DOL to operate in an uncertain
environment, with no clear guidance.
Participant cash-outs do not create a pain
point. However, he says, if plan sponsors
care about the retirement readiness of
their participants and feel responsible to
help, cash-outs are " a disaster of biblical
proportions " for participant retirement
savings outcomes. -Rebecca Moore
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PLANSPONSOR - October/November 2018

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