Rollover and Retirement Transitions Must Be Improved

Little has changed over the decades in the way participants move between plans or complete rollovers into an IRA.

While few could argue the retirement planning industry has not made tremendous strides in getting people involved in regular savings, fewer advances have been made in helping individuals transition between jobs or into retirement, according to a white paper from DST Systems.

The white paper argues there is clearly a need for greater availability of advice and product in this area, yet providers also feel limited in terms of what they can offer.

“Participants need simplified services to facilitate the transition between plans or to rollover individual retirement accounts (IRAs),” researchers argue. “They need continued follow-up to ensure assets are allocated to meet retirement goals.”

According to DST Systems, recordkeeper and plan sponsor support is essential during critical transition events that will inevitably come up during the typical plan participant’s working lifetime. These events include an anticipated or unanticipated job loss, a death or disability in the family, new relationships, the transition to retirement, etc. 

“Participants who become eligible for distributions from their retirement plans face numerous complicated choices—choices they are often ill equipped to make on their own,” the report explains. “The rollover process is often complicated, time intensive, and inefficient—resulting in bad decisions and worse outcomes.”

DST argues the distribution/rollover decision is the point where participants are perhaps the most vulnerable. In fact, approximately 5% of participants make the decision to cash out their plan balances when leaving a former employer—concentrated among those with smaller balances. This state of affairs “illustrates a need for more participant education about the value of staying invested in the market and of compounding growth of even small investments over the long term.”

The report goes on to suggest that, during life-change events, getting the rollover decision right is of vast importance for participants’ long-term outcomes.

“The choices participants make have long-term implications on their retirement savings … For instance, participants could face potentially serious tax issues if the disbursement of their retirement plan money is handled incorrectly,” the report warns. “Or, they could move their retirement assets into investments that are inappropriate for their risk profile and long-term goals. Others may utilize less effective and more expensive retirement vendors, accounts, or investment products which could dampen over the long term.”

The current structure of the rollover process does little to minimize or mitigate these concerns, the DST research concludes. In fact, the existing “hands-off” rollover model “creates a void of support during a critical moment of need … Where there should be simplicity and ease-of-use, there is frustration.”

The report urges providers to commit to innovation in this area.

“It is largely a manual process that is paper intensive and rarely streamlined,” the report concludes. “Recordkeepers, plan providers, and plan sponsors could lead this change to help improve the rollover and roll-in process.”

The full white paper can be downloaded here