The 2014 ERISA Advisory Council examined recent movement of participant assets out of defined contribution (DC) and defined benefit (DB) plans—as plan distributions or rollovers into retirement accounts not covered by the Employee Retirement Income Security Act (ERISA), such as individual retirement accounts (IRAs) or other savings accounts.

The Council’s report provides ideas for plan administrators and plan participants, including communication strategies and plan design options to facilitate lifetime retirement plan participation.

The Council noted it heard considerable testimony about the various factors terminating employees might consider in evaluating whether to keep assets in an employer-sponsored retirement plan, take a cash distribution, or roll assets into an IRA. According to the report, some factors participants may wish to consider include:

• The plan’s fees versus the fees of an IRA;
• Investment vehicles offered in the plan versus another savings vehicle;
• Availability of loans;
• Tax considerations;
• IRAs are not subject to ERISA;
• Protection against creditors;
• The need for immediate cash; and
• The health of the participant.

In addition, the Council looked at considerations for plan sponsors when deciding whether to encourage participants to keep assets in the plan. According to the report, Robert Hunkeler, vice president of investments at International Paper and a former chair of the Committee on Investment of Employee Benefit Assets (CIEBA), indicated 90% of CIEBA members surveyed (who primarily represent the investment functions at plan sponsors) indicated that keeping participants in ERISA-covered DC plans after termination of employment is a good idea because it will result in lower participant costs and provide ERISA fiduciary protections. On the other hand, only around 60% of the surveyed plan participants felt that their company wanted to keep participants in the plan, and less than one-quarter of the plan sponsors had a program in place to encourage retention.

Hunkeler attributed this difference more to the newness of the concept than to opposition, as less than 10% of those surveyed felt their organization would be opposed to the concept of employee retention in their plan. He said the primary reasons for not having a retention program were that “it was a low corporate priority and that there were concerns about fiduciary liability and cost.”

The Council looked at notices required when a retirement plan participant requests a distribution and the information available about distribution options on certain websites. It offered communication steps for plan sponsors to consider to encourage participants to stay in their plans and for the Department of Labor (DOL) to consider in educating and encouraging plan sponsors and participants.

“Based on the testimony and statements presented, it is the Council’s view that participants need more information and advice to make informed decisions about how to handle potential plan distributions and that DOL can play a role in providing this information directly through its educational programs and indirectly by encouraging plan sponsors to provide educational materials to participants at various stages during their employment relationship and beyond after employment has ended,” the Council wrote in its report.

The Council noted that if employer-sponsored plans are to encourage lifetime plan participation, they will need to include more products and services geared towards retirees in the decumulation phase of saving. Lifetime income options, such as annuities, will likely play a more prominent role in the future. The Council said it believes additional guidance to sponsors about lifetime income, including an updated DC plan annuity safe harbor, would result in reducing some of the biggest barriers to inclusion of such options in plans today. Specifically, the Council recommends that DOL provide additional guidance to encourage plan sponsors to offer lifetime income options, including an updated defined contribution plan annuity selection safe harbor; and look for additional ways to make useful tools available, including the DOL’s Lifetime Income Calculator, and integrate existing tools such as My Social Security.

The ERISA Advisory Council’s report, “Issues and Considerations Surrounding Facilitating Lifetime Plan Participation,” is here.