Forced rollovers and safe harbors

Over a decade ago, the Department of Labor issued guidance for sponsors and recordkeepers on forced rollovers of accounts with less than $5,000.

When employees leave a plan, sponsors have the option of rolling over those accounts into IRAs with very limited investment options.

The unintended consequence of DOL’s safe harbor—designed to protect orphaned assets from volatile equity markets—has been that accounts often lose value when warehoused in low-performing IRAs with high fees, according to a 2014 Government Accountability Office study.

Based in Charlotte, North Carolina, Retirement Clearinghouse has been consulting with sponsors and recordkeepers on plan portability and asset consolidation services for defined contribution plans since 2001.

For much of the past several years, Williams has spent his time knocking on the doors of both recordkeepers and regulators in Washington, D.C., advocating for an automated rollover solution for the billions in orphaned 401(k) plans.

The policy argument—that an increasingly mobile workforce is losing valuable savings opportunities by not consolidating assets into current employer retirement plans—is clear to stakeholders in the private and public sector, says Williams.

But often, recordkeepers and other providers have been left wondering what consolidation would mean for their top lines.

“That was the motivation behind APS,” said Williams in an interview. “Our objective was to create a tool that in a three to five minute window would illustrate the long-term benefits to auto-portability for plan providers.”

Williams said his team applied the “best available data standard,” mining EBRI resources, to create a tool that demonstrates the value of auto-roll-ins for smaller accounts, and then compared that value to what the future looks like under the status quo.

Absent automatic portability, the APS application shows that by 2045, low-account-value cash-outs could total as much as $345 billion in plan assets, compared to only $15.8 billion in assets that follow workers to new employer plans.

But when accounting for automatic portability, the APS tool projects that by 2045, plan cash-outs would be limited to $164 billion, and roll-in totals would increase to nearly $130 billion.

Beyond the societal benefits of reducing leakage and improving retirement outcomes for what is often the most vulnerable of savers, Williams says the latter number—$130 billion in roll-in assets—will hold recordkeepers’ attention.

“That reality would be valuable to every recordkeeper in the business,” said Williams.

DOL rule an impediment to automatic portability?

In the wake of DOL’s finalized fiduciary rule, industry stakeholders and ERISA experts have raised the question of whether or not the rule’s Best Interest Contract Exemption could impede roll-ins from one plan to another.

Recommending a participant roll assets from a plan that had lower fees into a current plan with higher fees would be a fiduciary act, and trigger the BIC exemption for advisors and recordkeepers who encourage the asset consolidation that nearly all stakeholders, irrespective of their support for DOL’s fiduciary rule, see as instrumental to plan participants’ best interests.

Williams concedes regulators will have to address that concern if and when they issue guidance for automatic portability. But he is confident the overall objective of automatic portability is in lockstep with the main goal of DOL’s rule—to improve retirement outcomes by requiring a fiduciary standard of care of plan assets.

“The fiduciary rule isn’t even cold yet----it’s going to take a while to sort through,” said Williams. “But what the DOL has left unsaid with the rule is that it wants retirement assets left in qualified plans. Automatic portability is a clear step towards that goal.”

The simple math behind Retirement Clearinghouse’s mission will go a long way to convincing regulators, argues Williams. In one subset of 1,400 participants with assets in more than one account, Williams says the new APS tool shows automatic portability could increase the average account balance by 45 percent.

Improvements on that scale will motivate regulators to clarify how the fiduciary rule will affect the future of automatic portability, said Williams.

“When you are talking about rolling in assets for one plan to another when there is a 100 basis point discrepancy in fees, then that would be hard to justify,” said Williams.

“But when the difference is 10 basis points, or 30 basis points, it is still clearly in participants’ best interests to have the assets consolidated,” said Williams.

Williams said the issue of the DOL rule’s potential unintended consequence on orphaned 401(k) plans has already been raised in talks with regulators.

They have been receptive to feedback, he said.