It sounds like a silly question until you consider that they can both gradually and silently drag down performance and increase risk.
The fact is, many of us drive cars with under-inflated tires. In doing so, we unintentionally increase the risk of a crash, waste power from our engines, and burn an extra 144 gallons of gas per year.1 The reason we continue to drive this way, day after day, is because we don’t “feel” the lost efficiency and increased risk. It happens slowly and quietly over time.
The same occurs in your sponsors’ plans. A glut of terminated participants on the books can drag down a plan’s efficiency.
They increase your head count, which serves to increase plan costs if fees are assessed on a per-participant basis.
They decrease your average account balance, which limits the plan’s ability to negotiate better fees from the plan provider.
Worse, the recent LaRue ruling2 has shown how terminated participants are a danger to your plan. Participants now have the right to sue plan sponsors for breach of fiduciary responsibility. But how do your sponsors perform their fiduciary duties for a former employee who has moved and not left a forwarding address? Terminated participants expose your sponsors to fiduciary risk.
EGTRRA, LaRue, Auto-enrollment, and Turn-over: The Perfect Storm
Prior to EGTRRA, advisers could set up a retirement plan to cash-out de-minimus accounts up to $5,000. In 2004, though, the DOL proposed Safe Harbor regulations that allowed automatic rollovers–and disallowed forced cash distributions–for balances below $5,000 and above $1,000. At the time, many EGTRRA provisions seemed unclear and were not clarified or made permanent until the Pension Protection Act of 2006. As a result, sponsors and advisers often chose to simply play it safe, lowering their cash-out threshold to $1,000.
Then came auto-enrollment. Nationwide, plans saw more and more terminated participants with low balances swelling their books. Now we have the LaRue ruling, and every one of those terminated participants potentially has standing to sue their plan.
The Solution: EGTRRA Restatements
Instead of just allowing your plan sponsors to bear the burdens of inefficiency and risk, you can use EGTRRA to your advantage. This year, employer-sponsored retirement plans are restating their EGTRRA filings. Since you’re currently going through the paperwork, you should take advantage of EGTRRA’s safe harbor auto-rollover provision. An adviser can engage a third-party provider to locate missing participants, roll over non-responsive participants below $5,000 (including those below $1,000), service all terminated participants in retirement preparation, and help direct high-balance leads to your wealth management practice.
Selecting a Rollover Solution
In selecting your rollover service provider, it is important to keep your sponsors’ needs in mind:
- Independence: Sponsors are increasingly wary of IRAs populated by proprietary funds, giving the appearance that participants are “forced” into a product.
- Costs: Run scenarios to ensure that the Safe Harbor IRA doesn’t rapidly deplete accounts due to excessive fees.
- Participant assistance: Look for a provider that locates and communicates with terminated participants, is equipped with licensed professionals that can help participants understand their options, and provides complete transaction assistance. Many solutions leave participants to find their own way. These participants probably need the most help and are the most likely to cash-out on their retirement.
- Fair treatment: You want a service that provides the same level of service to all participants, regardless of account size. This generates a true “win-win” to the sponsor, participant, and adviser.
Pump Up Your Plan Efficiency
EGTRRA restatement time offers you the chance to tune-up your plans. Choose an independent Safe Harbor IRA provider that improves your plans’ efficiency, lowers your sponsors’ exposure to risk, and–best of all—helps to demonstrate the value you provide as a retirement plan adviser.
Previous articles in this series are:
- Perspective: Helping Your Plan Sponsors Avoid the “Cash Out’ (August)
- Perspective: Strategies for Revenue Enhancement (July)
- Perspective: Staying on Top of 2008 Plan Changes (June)
- Perspective: Wake Up! (May)
- Perspective: Understand Your Clients to Improve Your Bottom Line (April)
- Perspective: Emerging Challenges for Plan Management (March)
- Perspective: Turning Automated Rollovers into a Win-Win (February)
1 U.S. Dept. of Energy Fuel Economy Guide www.fueleconomy.gov
2 LaRue v. DeWolff Boberg & Associates, Inc. et al., 128 S.Ct. 1020
Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and as a leader in creating and building the company’s retirement income and rollover IRA lines of business.
© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be considered investment advice.