Auto Roll-Ins Should Complement Auto-Enrollment

About half of participants cash out of IRAs their small balances are rolled into, and by not rolling these assets into new plans, they are losing the benefit of compounding.

Retirement Clearinghouse last year introduced a service that will match participants automatically rolled out of their 401(k) plans with new plans in which they can roll over those balances.

Spencer Williams, president and CEO of Retirement Clearinghouse, says automatic roll-ins should complement automatic enrollment. “I understand why plan sponsors want to get rid of small balances, but putting assets into a safe harbor IRA is like putting them into a landfill,” he said. “Many accounts get eaten up by fees, and many participants cash out these IRAs.”

Williams told attendees of the Plan Sponsor Council of America’s (PSCA’s) 69th Annual Conference that about half of participants cash out and the average balance of these cash outs is $1,700. By not rolling these assets into new plans, participants are losing the benefit of compounding.  Also, an automatic roll-in would provide participants with all the fiduciary and group purchase protections of Employee Retirement Income Security Act (ERISA) plans.

Williams said 98% of plans accept rollovers from other plans, and he pointed to Retirement Clearinghouse research that found the majority of Millennials and Generation X want all their retirement savings in employer plans. However, participants claim the process is cumbersome and takes a long time.

Williams said there is a need for a service that will take employee information from the safe harbor IRA and send out to recordkeepers to see if they have an active 401(k) account that matches that participant. If they do, assets in the safe harbor IRA will be rolled into that 401(k) account into the default investment alternative.

Retirement Clearinghouse has seen this process reduce participant withdrawals of the automatic rollovers by 50% or more.

He noted that some recordkeepers fear this will violate ERISA rules because participants are not giving consent to this transfer of money, but Retirement Clearinghouse is awaiting an advisory opinion from the Department of Labor (DOL) that says this process using negative consent is OK.