Time to Move On

As recently as a decade ago, there was a tendency for participants to spend their retirement plan asset distribution instead of rolling it over, notes Kevin Crain, the Head of Institutional Client Relations for Bank of America Merrill Lynch in Hopewell, New Jersey. According to Crain, in the 1990s, less than 50% of participants who took full distributions rolled them over.  

However, there appears to have been a metamorphosis of sorts, as a much higher percentage of people now roll over distributions on termination of employment, says Crain, with more than 85% of the company’s proprietary 401(k) participants who elect full distributions rolling them over. 

Historically, plan participants on termination of employment had three choices: They could keep the money in the plan, cash it out, or roll it over into an IRA—most often an individual mutual fund account, says Kristin Gibson, Director, National Accounts, Retirement Services at Russell Investments.  That default, she adds, was usually a mutual fund IRA. Historically, sponsors generally did not want to provide any advice to employees on what to do when they terminated employment, says Mike Hager, President of Hager Strategic, Inc., in Washington.  

However, says Gibson, as the importance of the defined contri­bution (DC) plan has increased, the plan sponsor’s involvement, just like participant involvement, increased. Now, there is greater diversity in the rollover process and not just at retirement, says Gibson. Retirement plan money is now likely to be rolled over into an individual product, which could be a variety of solutions, says Gibson, including mutual funds, bank CDs, and brokerage accounts.  The plan sponsor, often working with an adviser, plays a role in deciding how broad the options are, says Gibson, as well as how much assistance to provide in the process.  Yet, she emphasizes, it is the participant who makes the final decision on what rollover option to choose. 

New tools allow sponsors to link with networks of mutual fund providers, says Hager, so that, when people terminate employment or retire, they can choose a provider to roll over their account to and have the funds transferred electronically. Wealth Management Systems (WMSI), a third-party provider, offers one such solution, he says.  Financial Engines—which is used by many employers for retirement planning purposes and, increasingly, for managed accounts—also has been trying to gauge employers’ interest in offering a better mix of investments that are more suitable for employees who keep their money in the plan after leaving or retiring, allowing these employees to take advantage of the negotiated lower asset management fees, he adds.  

The increase in the number of rollover options for participants has led to opportunities for advisers, says Gibson. More choices mean more confusion, she explains, and advisers can play a role in clearing up that confusion.   

Participants now are seeking assistance in determining what to do with money in retirement plans when they leave a job, says Gibson. Advisers can help walk people through the rollover process. This means that advisers now have the opportunity to create relationships with people as they leave the plan, allowing advisers to continue to provide services, she says.  If participants have the time, interest, and expertise to oversee their retirement savings on their own, there are a number of good platforms where individuals can work with licensed counselors or rollover teams at the call centers of major broker/dealers, she adds.  

Realizing the need, recordkeepers are partnering more with advisers to include them in the rollover process, says Gibson.  Advisers and recordkeepers are finding ways to partner that are best for the plan sponsor, the adviser, the participant, and the plan as a whole, she says.  This includes recognizing that advisers who are selling plans can add value to participants in those plans through activities such as on-site retirement seminars offers and individual personal financial planning assistance, she adds. Additionally, adds Crain, plan sponsors now want to offer their workers more education as to the best options when they roll over, says Crain, and are looking for advisers who can do that.  

When evaluating rollover options, there are a number of items that should be considered. First, look beyond plan assets.  Advisers should look holistically at all the assets and resources someone has for retirement when determining the best rollover option, says Gibson.