Do They Belong?

Art by Peter Diamond

When adviser David Hinderstein starts working with a new retirement plan sponsor client, his goals include helping that sponsor have a strong plan design and participant communications that reflect the mission and culture of that organization.

“Sometimes, their retirement plan is inconsistent with the culture and mission of their organization,” says Hinderstein, president of Strategic Retirement Group Inc., headquartered in White Plains, New York. That disconnect can extend to making decisions for what to do about ex-employees, retirees and workers who have stopped participating in the plan, he says.

Below, Hinderstein and others talk about issues for sponsors to consider regarding their nonactive participants.

Retired Participants
Employers need to decide whether they would prefer that retired participants stay in the plan or leave, because either influences plan design and communications decisions. “When we talk to [plan sponsors] about it, we try to get them to explain their philosophy on their retiree population,” says Rob Massa, president of Ascende Wealth Advisors Inc. in Houston. Some employers value maintaining that connection, but others do not. To give sponsors more clarity, Ascende often finds it helpful to run an analysis of what a plan’s retired participants actually do with their account. “How many have account balances left? And, for those who do, what is the size of those account balances?” he says. “If  there are very few, clearly those people who retire are taking their money out of the plan anyway.”

How a plan handles administrative fees also often influences whether a sponsor prefers retirees keep their money in the plan or take a distribution, says Grant Arends, president of consulting services at Alliance Benefit Group Financial Services Corp., in the firm’s Kansas City, Missouri, office. He finds that many small to medium-size employers have chosen to pay their plan’s administrative fees out of corporate funds. These sponsors may prefer if retirees or terminated employees roll their money out of the plan. But, for plans that have a participant-paid, asset-based fee on a declining scale based on total plan assets, sponsors may like to see retirees’ accounts remain. The resulting higher plan asset base reduces pro rata administrative fees for all participants.

On the other hand, some employers fear the administrative headache of retirees remaining, says Kelli Send, senior vice president, participant services, at adviser Francis Investment Counsel LLC in Brookfield, Wisconsin. “They may find that the spouse of a worker who has not been there for 20 years is still calling with questions,” she says.

Yet, employers increasingly see the value of encouraging retirees to stay in the plan, Send says. They realize that many workers nearing retirement worry about where to put their savings safely. “It’s the No. 1 anxiety-producing issue as workers transition into retirement,” she says. “The prospect of turning over their life savings to someone is scary.”

If plans decide to provide systematic withdrawals as a distribution choice, that helps encourage retirees to remain. “We are seeing a lot more plan sponsors offer systematic withdrawals,” Arends says. A sponsor that would prefer to see retirees take their money elsewhere may decide against this option, however.

Francis Investment Counsel suggests that all plan sponsors allow installment payments to be made, to facilitate participants remaining in their plan, Send says. “There is less anxiety with participants if they can stay in the plan,” she says, “and there also is the benefit that leaving their assets in the plan reduces costs,” due to economies of scale.

Keep in mind that recordkeepers vary not only in whether they will offer systematic withdrawals but the fees they charge participants for those transactions, says Jake Winegrad, senior adviser at Moneta Group LLC in St. Louis. If sponsors want to encourage retirees to stay, “you have to have a system that allows them to utilize their savings in the way they want to, at a frequency that is flexible, and in a cost-effective way,” he says. “The key thing is flexibility. Every retired person is different. The recordkeeping technology needs to support that.”

To increase participants’ flexibility even more, Francis also encourages plans that have a Roth feature to allow “source-specific” withdrawals by retirement-age participants, Send says. Because of the different tax treatment on withdrawals, “participants should be able to say, ‘I want that money taken from just my Roth balance, or just my pre-tax balance,’” she says.

Departed Employees
For workers who have left an employer for another job elsewhere, their former company likely would rather see them roll out their money, Massa says. “A ‘lost’ participant can be an administrative hassle,” he says, citing the difficulty of tracking down a former employee who has moved and provided no forwarding address but who still needs to get required plan notices. “Most organizations are resource-constrained already,” he says. “They’re looking to simplify administration.”

But sponsors may not simply tell all terminated employees to leave. “The problem is, there’s not really a difference from a legal perspective” in terms of these participants’ right to remain in the plan if they do not choose to leave it, Winegrad says.

He says that sponsors mainly have the option to implement a “force-out” provision that periodically rolls the money of any terminated employee with a vested balance between $1,000 and $5,000 into an individual retirement account (IRA) set up in that person’s name. A sponsor may decide on the threshold within the $1,000 to $5,000 range; one seeking to remove as many low-balance participants as possible would choose to go with the $5,000 threshold for a mandatory rollover. In addition, sponsors may force participants with a balance of less than $1,000 to cash out.

Implementing a force-out provision can help with testing issues and boost plan-health statistics by eliminating many very low balances, says adviser Mike Brown, managing partner at ClearPoint Financial in Bellevue, Washington. At high-turnover companies in industries such as retail or food services, “they very, very much want terminated employees to roll out of the plan,” he says. “In a high-turnover industry at a plan that uses automatic enrollment, they have these huge percentages of employees with a balance of less than $5,000. There may end up being two or three times the number of terminated employees in the plan as there are active employees.”

A force-out process requires little work from plan sponsors, Winegrad observes. “It’s making sure you have a recordkeeping partner with a system that periodically combs through the participant base and forces out those people,” he says. As for what “periodically” means, “I think no less than annually is best practice,” he says.

Beyond doing force-outs, a sponsor can initiate a communications program aimed at terminated employees, explaining their options in plain English. “It can encourage them by sending and resending the rollover paperwork,” Brown says. “It can remind them of their options.” Most people leave their money in a plan not out of a proactive choice but because they get busy with other things or do not understand how to do a rollover, he says.

Massa says: “Make it simple, and make it straightforward. The easiest thing plans can do is to provide all the forms to take a distribution, partially completed where possible. And give [the sponsors] very explicit instructions on how to complete the forms.” If a plan’s provider has a phone number they can call with questions on how to do a rollover, include it.

Active Employees Not Contributing
For employees who participate but have stopped contributing, who opted out in the past or who never joined the plan in the first place, re-enrollment offers the biggest opportunity to get them on track, sources say. “We are having conversations with all of our clients about that,” Hinderstein says.

Still, sponsors contemplating re-enrollment have to consider budget impact due to higher match costs, he notes. They also need to decide philosophically if they agree with re-enrolling people who have previously decided not to participate or have stopped contributing. “Some sponsors say, ‘These employees have said no, they don’t want to participate. Why are we ramming this down their throats?’ Others say, ‘We care about their retirement readiness, and we want employees to have a dignified retirement.’ It really comes back to the employer’s philosophical beliefs and how it wants to work with its work force,” he says.

Brown sees more plans going ahead with re-enrollment now. “There is more of a comfort level—it’s no longer a new, radical thing,” he says. Many sponsors also have taken a closer look at their plan’s overall health and become aware of troubling issues such as retirement-savings gaps and excessive balances in a stable value fund, he says.

Some employers initially balk at re-enrollment because it strikes them as paternalistic, Massa says, and he finds that it helps to explore that perception with them further. For example, Ascende Wealth Advisors has clients in the energy industry that have extensive workplace safety programs. “We tell them, ‘That’s paternalistic—you’re already practicing paternalism,’” he says.

Once plan sponsors decide to perform a re-enrollment, they have choices regarding the terms, and advisers can help sponsors avoid overly conservative choices. “We find that a 6% deferral rate has the same opt-out rate as a 3% rate, so why not start people at 6%?” Arends says.

Francis Investment Counsel advocates that plans consider a 5% initial deferral rate coupled with 1% annual auto-escalation up to 15%, Send says. Sponsors have a choice as to timing, but they rarely re-enroll annually, she says. “Most of our plans implement re-enrollment campaigns as needed to improve savings behaviors,” she says.

Additionally, a plan sponsor needs to think about how to frame the re-enrollment when communicating it to employees. Many have utilized the concept of employees leaving “free money” on the table by neglecting to take the full employer match, but Massa frames it differently. “I try to stay away from ‘free money.’ It sends the wrong message,” he says. Employees understand that it obviously does cost them money to contribute to their retirement account.

“I focus on the ‘raise’ concept with them,” Massa says. “I tell them, ‘If you’re not taking full advantage of the match, you’re essentially giving up part of a raise.’”

Despite sponsor concern, re-enrollment usually has low opt-out rates, sources say. “The ‘stick’ rate is over 90%,” Brown observes.

Arends says people want to save but, if left to decide for themselves, may feel unable to afford it. “We find that [when they’re re-enrolled], most say, ‘You’re right; it’s really not that big of a bite out of my paycheck,’” he says.

Participant inertia helps plans in a re-enrollment, Send says. “Pretty soon, people are feeling proud and thankful that they’re saving, and they embrace it.”

Key Takeaways:

• Sponsors are considering retaining retirees’ assets.
• Departed employees are typically encouraged to leave.
• Re-enrollment is used for inactive participants.