The Full View

Art by Daniel Shaffer

Whatever term one chooses to employ—“The Great Quit,” “The Great Resignation,” The Great Job Hop”—a significant number of workers are changing jobs these days. All told, according to global job site Indeed, during the last seven months of 2021, 38 million workers quit their jobs. Some of those may be job switchers, leaving low-wage industries such as food service for higher pay, and some may be the millions of workers who still sit on the sidelines. A wealth of questions and conversations spring from these numbers.

But, for retirement plan advisers, one of the critical takeaways may be the fact that many Americans have tax-qualified retirement assets saved in defined contribution (DC) plans operated by a prior employer.
This simple fact raises some important questions for the retirement industry to ponder: Should plan advisers encourage participants to consider consolidating their retirement accounts? And, short of promoting account consolidation, how can advisers work with plan sponsors and providers to ensure they have a full view of participants’ savings, including assets held outside the workers’ current plan?

Consolidation vs. Cash-Outs

According to David Stinnett, principal and head of Vanguard Strategic Retirement Consulting, part of The Vanguard Group, in Dallas, some workers may actively decide to remain in their previous employer’s DC plan, based on factors such as availability of specific investments or advantageous pricing offered by the plan. Yet, many others simply postpone or forgo account consolidation due to inertia, or because they are unaware they have this way to move their money.

The most problematic outcome, Stinnett says, is when participants overlook the consolidation opportunity and opt for a cash-out. Fortunately, cash-outs are not the norm, but they are also not exactly rare, at least in Vanguard’s recordkeeping universe. This means advisers can help plan sponsors to discourage cash-outs in situations other than financial emergencies or severe hardships.

“A majority of participants—83%—preserved their retirement assets when leaving an employer, by either remaining in their prior plan or by rolling their assets over to an IRA [individual retirement account] or other qualified plan,” Stinnett says, citing data from Vanguard’s “How America Saves, 2021” report.

Unfortunately, Stinnett says, the data show that non-retirees who take cash-outs are unlikely to set aside their newfound cash assets for retirement.

Although his current focus is individual wealth management, for many years, Alex Reffett, principal and co-founder of the advisory firm East Paces Group in Atlanta, worked on a team that primarily managed corporate retirement plans; in this role, he consulted with individual participants about their retirement prospects.

“Working with so many individuals, you really saw a lot of everything, and people would open up to you about their financial lives,” Reffett reflects. “Frankly, I had many discussions with individuals about the mistakes they’d made, and, I can tell you, there are a lot of people who have regrets about cashing out their 401(k) account, often because they didn’t realize the tax penalties they’d face. So, in that sense, providing guidance and advice about small-account consolidation is one of the most important things retirement plan advisers can do to help people.”

Better Visibility, Better Outcomes

Jim Scheinberg, a managing partner with North Pier Search Consulting in Marina Del Rey, California, points to another issue that arises when employees neglect to consolidate their accounts: They may receive misleading retirement readiness calculations.

“So many people don’t roll their prior plan balance into their new employer’s plan that the new plan sponsor, being unable to capture that data when it’s doing retirement readiness forecasting, potentially leaves these folks with bad information and a misperception about their preparedness,” Scheinberg notes.

He says the leading recordkeepers work hard to expand their ability to pull in external account data, whether it be from a 401(k) plan, an IRA or even nonqualified personal savings and investments. Without being able to do so, he says, advisers and sponsors may get only a small piece of an individual worker’s financial picture.

“This situation can greatly reduce the projected value of the monthly income estimate that almost every recordkeeper is providing on its website and even on its statements,” Scheinberg says. “If you don’t have the ability to give an accurate, holistic projection, people will either have a false, heightened element of fear—or more likely they’re going to recognize that they’re seeing only partial data. They may discount their projection entirely, because it doesn’t tell the whole story.”

In the view of Stephanie Hunt, a retirement plan consultant at OneDigital Retirement + Wealth in Savannah, Georgia, recordkeepers, plan sponsors and advisers have a duty to ensure the accuracy of retirement projections, but the onus also falls on the individual employee. She urges employees to engage with their current plan and provide the information needed to create a clearer picture of their specific needs and challenges.

“Many of the basic retirement readiness measures don’t consider other factors,” Hunt adds. “If someone is married, a spouse may contribute significantly to retirement readiness, or there may be wealth coming from a pension plan with some other company. The typical projection doesn’t consider everything.”

Ultimately, greater insight stems from close and frequent employee engagement, and only participants can control that. From her perspective, Hunt says, the encouragement of the plan adviser and the plan sponsor can go a long way to foster such engagement.

Short Tenures, Old Systems, Lost Accounts

During his time advising participants, Reffett says, the frequency of their changing jobs did seem to increase substantially.

“With the trend of shorter tenures, naturally you have less time in each position to accumulate retirement funds,” he observes. “Because of that, [participants] may have a relatively small amount of money in any given retirement plan, and this makes it more likely that it will be left behind and never consolidated. It can also leave them with an overly negative readiness projection, especially if Social Security is not being factored in, as well.”

Reffett says individuals moving from job to job may get caught up with thinking about a great new salary or with relocating to a new city and buying a home.

“They just forget about their old account, and there is not a great infrastructure in place to show them their overall savings picture or to make consolidation seem like the sensible thing to do,” he says.

This is true in the observation of Gaurav Sharma, CEO and co-founder of Capitalize, a venture-backed fintech company working to drive innovation in the retirement savings market. In fact, his firm recently collaborated with the Center for Retirement Research at Boston College (CRR) on an analysis that concluded that “forgotten” retirement accounts amount to nearly $1.35 trillion in total assets, a sum that represents as much as 20% of the approximately $6.7 trillion invested in 401(k) plans.

“When it comes to account consolidation, it is a very high-friction situation, which leads to suboptimal outcomes,” Sharma says. “This is actually the central thesis behind the founding of Capitalize and the platform we have built to facilitate rollovers. Today, the usual process of moving participants’ money to their new employer’s 401(k) plan is a very old-school, manual and cumbersome experience, it’s so disconnected from the otherwise tech-first world in which we live and in which our financial lives unfold.”

Reffett agrees with that take wholeheartedly, suggesting advisers can bring additional value to the table by becoming knowledgeable about account consolidation and providing more holistic retirement readiness projections. Both Sharma and Reffett say they have talked to workers who actually started the rollover process but then quit because it was that challenging. They note that the adviser is in a position to help such participants see the process through—and to help them understand their full readiness picture.

A Better Way Is Emerging

Stinnett and Sharma say the account consolidation and retirement readiness projection experience is ripe for disruption. In fact, both of their firms are shaking the status quo, they say, as are some others in the retirement plan services ecosystem. In Vanguard’s case, the firm is now working with Retirement Clearinghouse (RCH) to provide plan sponsors with a new portability solution meant to simplify making small-balance 401(k) rollovers. The service is expected to launch in the middle of this year.

Once operational, the automatic portability program will be able to facilitate the movement of an employee’s 401(k) savings account from a former employer’s plan into an active account with the current employer. Reffett says he is encouraged by the fact that providers are taking these steps, and he says Vanguard is not alone in its efforts.

For his part, Sharma is bullish about the prospects for a better rollover and consolidation experience, not least of all because his firm is fixed on remaking the space.

“From our point of view, the first step toward better outcomes is to help people find their money, whether they know where it is custodied or not,” he explains. “To address this first step, we have built what I believe to be the premier database that can help individuals locate their money. At this stage in our build-out, we believe we can locate well over three-quarters of all ‘lost’ accounts.”

Besides helping individuals find their lost money, the Capitalize platform can then facilitate a rollover into an IRA. Those who would prefer not to roll over the money at least now know where it is.

“I would say that, with most providers, things are getting better,” Reffett says. “The recordkeeper community has realized that there’s a pinch point here and that their business interest in retaining assets is simply not worth the trouble that lost accounts cause on their end or on the end of their clients. I’m encouraged that participants can do more of this stuff online now. Consolidations are getting easier, and projections are getting more accurate.”