These “orphaned” accounts create a fertile ground for inefficiencies and ineffectiveness – a “Plan Performance Gap” that limits financial results while increasing fiduciary risks, plan costs, and administrative burdens.
Furthermore, the Pension Protection Act, which was designed to protect and encourage retirement savings, may make the situation even worse. One of its provisions removes barriers and adds incentives that encourage employers to automatically enroll their employees in defined contribution plans. As more employers take advantage of auto-enrollment, the number of orphaned and inactive accounts will grow. This is likely to reduce the average participant account size, thus making plans less attractive to service providers and creating a bigger Plan Performance Gap.
There are two ways employers and their advisers can turn this potential problem into an opportunity. The first is by helping participants roll over money held in previous retirement accounts into their current plans. This not only increases the average account size, it also helps participants manage their retirement savings more effectively.
The second strategy is to help former employees move their money out of the plan. This goal can best be achieved by giving participants access to third-party advice and support as well as quality, low-cost IRA options.
Retaining the balances of former employees substantially increases the amount of work required to service the plans. Because these terminated employees often have low-balance accounts, they are major contributors to the Plan Performance Gap. This is especially significant for companies with high turnover. One such company was able to reduce fees by more than $750,000 annually by adopting a pro-active rollover strategy. The plan manager used an outside service provider to administer the process, which involved some 70,000 inactive participants. Because 62,000 of them opted to roll their savings into other accounts, the administrative burden associated with finding and contacting former employees was greatly reduced.
In reality, everyone is a winner with automated rollover.
- Plan sponsors reduce their administrative burden and liability exposure, increase average account balances, and realize true cost savings.
- Participants are able to consolidate account balances in one place, making it easier to monitor and manage retirement savings.
- Advisers and TPAs can improve revenue, differentiate their practices, and enhance their value to their clients. In addition, they can structure the process so that they maintain relationships with those participants who have the highest balances and outsource the less profitable accounts.
Finally – if the process is handled in the right way, with high-touch, personal support – participants receive the education, assistance, and encouragement they need to stay invested in retirement.
Spencer Williams is president and CEO of RolloverSystems. Spencer joined RolloverSystems in 2007. 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 from 1997 to 2007, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and most recently in a leadership role in starting 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 construed with investment advice.