They Should Take It With Them
Auto-portability can dramatically effect workers’ savings when the person moves from job to job.
Reported by Alison Cooke Mintzer
Alison Cooke Mintzer (photo by Chris Ramirez)
While safe harbor IRAs keep the money qualified for terminating participants, many of these assets lose their qualified status—in fact, 75% of participants cash out within three years. Once out of the system, this money gets diminished, by the taxes and early withdrawal penalties, the result being less earnings saved than if the person had never deferred.
But just because this idea hasn’t helped as anticipated doesn’t mean the motive was wrong. Its goal was excellent: to protect the assets of participants, especially to keep that money growing as they travel from job to job.
So, what can be done to improve on the idea piloted in EGTRRA of trying to protect small balances? There is a viable solution that I find intriguing, that has been cleared by the DOL but needs industry support.
I’m referring to auto-portability, which comes to us from Retirement Clearinghouse, formerly RolloverSystems. Auto-portability is a standardized, automated movement of an inactive participant’s retirement account of $5,000 or less from his former employer’s retirement plan to his active account in a new employer’s plan.
Last November, the DOL issued an advisory opinion on auto-portability, offering a safe harbor for plan sponsors and recordkeepers that pursued this course of action, by naming Retirement Clearinghouse as the fiduciary. It followed that up by issuing a final prohibited transaction exemption (PTE) for automatic portability, removing the requirement that participants consent to have their small balance of $5,000 or less in a safe harbor IRA automatically rolled into their new employer’s retirement plan.
This can have dramatic implications: Within a three-year period, 85% of participants who leave one plan go to an employer that also offers a defined contribution (DC) plan; two-thirds move to such an employer immediately. In its first pilot program with one U.S. employer of 250,000 employees, Retirement Clearinghouse matched the employer’s records of those workers against the couple hundred thousand small-balance IRAs for which Retirement Clearinghouse is the recordkeeper. It found 6,500 matches where participants had both accounts, and, of those, 1,300 gave Retirement Clearinghouse their consent to have their small IRA balance moved into their 401(k). As we know with the provisions of the Pension Protection Act of 2006 (PPA), if this was done automatically, most of the 6,500 would have kept their money in the plan instead of the minority that affirmatively elected it.
However, for this program to be successful, it takes advocacy to get recordkeepers and plan sponsors to sign on.
Sponsors can’t offer this until the recordkeepers do, and this is where advisers come in. Advisers are in a unique position to act as catalysts for auto-portability to become an offering. With your relationships across the industry, on both the plan sponsor and recordkeeper sides, you can be the advocate for recordkeepers to sign on and help participants aggregate balances. You can encourage participants to ask their providers about it, and talk up the benefits of the DOL guidance that protects sponsors when they make this election.
In my estimation, for an industry on outcomes, this concept seems like a no-brainer to embrace. For recordkeepers, this isn’t about losing assets. This is about looking at what is best for participants. Plan sponsors are already rolling these small balances into IRAs. Isn’t this a dramatically better option to kick-start a person saving in a new plan at a new job?