In 2007, one of RCH’s clients asked that a voluntary benefit be put in place for new hires, to help them roll their money into the plan.
“That’s when the lightbulb went off,” says Spencer Williams, president and CEO of Retirement Clearinghouse. “Here we are in the business of taking people out of the plan—a mandatory distribution—what if we set up a system with all the recordkeepers, and instead of sticking these small balances in a safe harbor IRA [individual retirement account], what if we went looking for their new 401(k) and automatically rolled them in?”
Some of the largest recordkeepers are currently exploring this possibility, Williams tells PLANADVISER. “They haven’t committed to moving forward, but they see exactly the same benefits, the first one being stopping the leakage.”
By creating this “electronic highway,” he says, plan sponsors can take further advantage of participant inertia. “Over time, the mobile work force becomes accustomed to their 401(k) moving with them and they stop cashing out.”
The Employee Benefit Research Institute (EBRI) reports that nearly 40% of 401(k)s today hold $10,000 or less, Williams says, and a large portion of that population has at least one other account. By automating this roll-in process, he believes the retirement industry could prevent the problem of disparate accounts and do a great service to participant demographics most likely to cash out a small balance.
Doing this requires a small change in thinking, Williams says. Looking at a plan, today the automatic rollover provision directs funds out of the plan environment. “If you connect the system with auto-portability, that same employer could now anticipate that some percentage of its new hires is going to arrive with a balance. So, instead of starting at zero the day they enroll, we automatically move their old account with them.” In a perfect world, he adds, “a plan would expect to receive as much as it distributes.”
How It Works
The process begins with a distribution of a small account balance—less than $5,000—from the plan, Williams explains.
“The plan distributes that $4,000 account to a safe harbor IRA. We now have an electronic record of who that person is and all of their demographic information associated with that account,” he says. “We then take that information—and, of course, we have to follow the highest protocol for security and confidentiality—but we essentially take that person’s Social Security number and we send it to all of the recordkeepers that are participating in the system.”
Those recordkeepers, he continues, can then search their systems for an active 401(k) attached to that individual. This is all done electronically, and if a recordkeeper locates an account for the same person, it sends a notice back to the clearinghouse. After verifying that both parties have the correct person—by checking, for instance, the last name, date of birth and address information—if the scoring system says that it is a true match, the account is then transferred from the safe harbor IRA to the new plan sponsor. Throughout this process, the individual is sent updates and given the choice to opt out.
“The Department of Labor [DOL] is actually working on what’s called an advisory opinion, which is really providing a legal statement—not only to us, but to the plan sponsor—that says this process of negative consent is OK. We’re hopeful that the Department of Labor will issue that opinion in the near future, and then we’ve got all the bases covered,” Williams says. “That could well be a trigger for the process moving forward and being adopted on a broader basis.”