Are Rollover IRAs on the Way Out?
I have long advocated for giving employees more options to manage their retirement plan assets, especially in regards to easier portability when workers change employers or retire. So when I came across an article entitled “Goodbye Rollovers, Hello Stay-Overs”, it got my attention.
The article suggests a new trend is emerging that could shift the way employees handle their retirement savings investment upon termination of employment. Called the “stay-over” approach, this trend will supposedly encourage participants to leave their accounts intact in their former employers’ plans rather than transferring or rolling over their funds when they retire.
Keeping Plan Costs Under Control
With increasing numbers of Baby Boomers in a position to withdraw their funds upon retirement, plan sponsors fear that a large reduction in plan portfolio size could limit their ability to negotiate fees with outside fund managers. This, in turn, could lead to an increase in overall plan costs. As a result, both plan sponsors and advisors could begin competing to keep retirees’ money in employer plans.
At first glance, this approach appears to offer benefits to both employers and plan participants. Employers will be able to control costs by keeping more assets under management in the plan. Participants will pay lower fees compared to transferring their money out of the plan. This approach would also simplify investing for participants by eliminating the need to sort through all the choices available in today’s investment markets.
It looks like a win-win for both sides, but I question some of the assumptions behind the strategy, as well its potential value to plan sponsors and participants.
Should Retirees Stay or Go?
Retirees who stay in their former employer’s plan would likely benefit from less expensive fees versus the increase required to pay for an independent investment advisor. However, this assumes that every terminated participant will want the services of an independent advisor, which may or may not be the case. Furthermore, participants who want to roll over their account balances can go directly to other providers, where they will likely pay lower fees than those charged by the former employer plan – even when including custody, transaction and advisory fees.
Granted, many retirees will need help when deciding where to transfer their money. However, there are many groups and low-cost programs, including a number of robo-advisors, available to help guide individuals at nominal or flat rates. With the commoditization of the industry these types of fees have significantly declined, and I believe they will continue to do so in the foreseeable future.
The Real Impact on Plan Sponsors
The appeal to retirees may or may not be universal, but what about plan sponsors?
Keeping more assets in the plan does have its advantages. However, the article failed to address several important issues related to the stay-over strategy. These include increased costs and fiduciary responsibilities to the plan sponsor for keeping former employees in the plan, as well as additional administrative time and costs.
For example, plan sponsors will need to maintain close contact with retirees still in the plan, keeping on top of address changes, monitoring death notices, and communicating with retirees (or their successors) when making changes to plan provisions or investments. Plan sponsors will also need to establish a process for communicating information conveyed at investment meetings to retirees who are unable to attend.
The stay-over approach might also prevent plan sponsors from taking advantage of opportunities to clean up their plans. Current regulations make it fairly easy to clean out small balance accounts – especially those with less than $5,000 in assets. Employers can legally transfer them out of the plan and into an Automatic Rollover IRA at no cost to the plan. This approach protects the employer in terms of the Safe Harbor available under 2550.404a-2, and may avoid annual plan audit costs of up to $10,000 or more by keeping their plans at less than 100 participants.
Furthermore, the stay-over approach might also increase the fiduciary liability for plan sponsors by keeping terminated participant money in the plan, especially account balances greater than $5,000. (In the interest of full disclosure, PenChecks Trust is a provider of Automatic Rollover and Missing Participant IRAs pursuant to DOL regulations 2550.404a-2 and 404a-3.) Finally, as basis point fees continue to come down across the board, the industry appears to be moving away from basis points toward a flat fee structure.
What About the Employees?
The article also overlooked a very important player in all this – the employee. Today’s American workforce is highly fluid, changing jobs every seven to 10 years, on average. For younger workers, it’s not unusual to switch jobs every two to three years. So it’s possible, and highly likely, that many employees will have anywhere from three to six jobs in their lifetime, possibly more.
Can you imagine the difficulty in trying to keep track of each retirement account from all those jobs? Add in the time and effort required to select the right investments and maintain the proper asset allocation and it can become a logistical nightmare, especially for people with little to no financial acumen. It’s no wonder the uncashed retirement check problem has grown into several billion dollars!
I understand the motivation to maximize assets under management in order to keep plan costs to a minimum. But I’m not convinced the stay-over approach is the best way to achieve this goal – for employers or employees. Before jumping on the bandwagon, plan sponsors and advisors should carefully examine both sides of the issue, while reevaluating the strategic importance of keeping as many plan assets under management as possible.
President and CEO