Encouraging participants to roll assets from a previous employer’s defined contribution (DC) plan reduces the potential for prematurely cashing out, BMO says in a new white paper for sponsors and their consultants, “BMO Defined Contribution IQ: Rollovers.” It is the second in a nine-part, bi-monthly educational series BMO has developed to help them create more successful DC plans, titled Defined Contribution IQ.
Secondly, as plan assets rise, all participants in the plan benefit from lower investment costs, which can have a dramatic impact on retirement outcomes, BMO says. Thirdly, participants benefit from professional oversight, and by bundling their assets, they can see more accurate retirement income projections.
“The average worker today will work for five to seven employers during his or her lifetime, so the flexibility to transfer retirement savings is extremely valuable,” says Todd Perala, author of the Defined Contribution IQ series and director of strategic initiatives at BMO. “We believe that if plan sponsors can help participants consolidate their retirement saving as they are on-boarded, then employers are really offering the potential for a better retirement to their employees—and doing it in a very economical manner.”
Sponsors can make the process easy by equipping participants with enrollment kits that explain the process simplistically, that include a user-friendly rollover form and that they inform participants they can reach call center reps who can walk them through the process, BMO says. For those employees leaving the company, sponsors should also explain the benefits of their rolling their assets over to their new employer, BMO adds.
Furthermore, to help those employees who are retiring, sponsors should offer funds that deliver periodic payments, even if it means modifying the plan’s design. “This gives retirees a straightforward way to turn their retirement savings into an income stream that replaces their paycheck,” Perala says.
BMO’s first Defined Contribution IQ white paper addressed how automatic features can significantly improve outcomes, encouraging sponsors to automatically enroll participants at a 6% savings rate with annual 1% or 2% escalations, and to use a target-date fund as the qualified default investment alternative.