There is a lot of buzz recently about the phrase “retirement readiness,” or making sure plan participants have saved enough to provide themselves with a secure retirement. If you haven’t heard the phrase before now, we can only assume you’ve been visiting somewhere very far away. Somewhere very dark and possibly full of bats.
One important aspect of retirement readiness is how it relates to employee tenure. It’s no secret that most employees these days won’t stick around long enough to earn the gold watch so coveted by earlier generations. True, many employers now offer a 401(k) or similar plan that allows employees to accumulate retirement savings. But a problem occurs when the employee moves on—and the plan balances do not.
Why should an employer address old plan balances?
Larry Deatherage, principal at San Diego’s Retirement Benefits Group, says this can lead to a piecemeal approach that may not be in the employees’ long-term best interests. That can add up to trouble for the employer that sponsors a plan and wants to help participants do the best job they can for their future retirement needs.
“Employers definitely should think about the issue of where new employees came from, and whether or not they had retirement assets there,” Deatherage says. “The reason is that, what tends to happen when somebody leaves a company, is those assets sometimes just get lost. The participants never look at them, and they don’t consolidate their accounts. This means that they may not be getting proper advice about how they invest.
“Many times any suggestions or advice they get through the plan will only consider the balance they have there. But the advice they need should be about all of their assets. In theory, a participant could have the wrong asset allocation because the advisor or the model being used isn’t aware of all the assets they have.”
Moving assets into the new plan may be best for the participant—but not always. Deatherage says there are many factors for the participant to consider, but he or she must be aware of them in order to make the best choice. “I think it’s important to realize that the new employer’s plan may be better than the one the participant left. If the new plan has lower fees, better investment options, and more services, then it may be beneficial for them to roll it into the new plan.” The converse is true, too.
Benefits of rollovers to the plan, other participants
There may be advantages to the plan of gaining rollovers, Deatherage says. “Usually the fees that are charged to the plan are based on average account balance, and as a fiduciary, employers need to think about that. You may be able to get better pricing from your vendors when you have more assets per participant. In my opinion, that’s a win/win. I don’t see any reason why the plan shouldn’t at least offer a service or a program that a participant can walk through to see if it is worthwhile to roll their past money into the new plan.”
Deatherage sees real value in a structured program to help employees deal with rollovers. The program he uses comes from LPL Financial, the broker/dealer with the most retirement plan assets. The program is one element of their Worksite Financial Solutions package, and he says it offers unbiased advice to employees who are changing employers.
“Through their help desk, they reach out to new employees, talking to them about whether or not to roll over their balance from a prior plan,” Deatherage explains. “They discuss the potential benefits of rolling it over. We can do a comparison of the plans. Then, if the person wants to, the help desk will do all the paperwork. Neither the participant nor the plan fiduciary needs to touch it; the help desk handles it for them.
“In addition to that, participants in new plans that sign up on the Employee Engagement module of Worksite Financial Solutions will get a letter asking them if they have an old rollover, if they want to talk about it, and offering help to roll that money into the new plan.”
While that may not seem groundbreaking, it is actually a new approach in the 401(k) arena. “Rollovers are something that people know they need to deal with, but often don’t know how to approach it. If you’re a new employee at a new company, whom do you talk to? A lot of times HR will give you the 1-800 number from the vendor, but they don’t help you with all the paperwork. Instead, they send you the paperwork and tell you to go call your old recordkeeper. So Worksite Financial Solutions provides a streamlined way of engaging that new participant, to make sure they’re making the right decisions for themself, and that they have the opportunity to make those decisions,” Deatherage says.
Remind people about rollovers
If your plan’s advisor does not have access to Worksite Financial Solutions, you may want to consider including rollover reminders as part of an annual campaign. “The advisor who works with the plan should make themselves available to answer questions for new hires,” Deatherage says. “In fact, he or she should be ready to talk to people who are currently in the plan about it, because they may not realize leaving an account behind could impact their future retirement.”
Why? Because old assets may not be invested in alignment with their current strategy. Or worse, the participant could completely lose track of the old accounts. “It’s really important to address any old plan balances you may have,” Deatherage says. “People won’t get as good of information from an advisor or an advice module if they don’t include those old balances in the discussion. Advice is only as good as the information that’s provided.
“So what we see is, you have an employee with this new company who has two or three accounts in the plans of former employers, and they go through an advice model. But if they didn’t factor in all the other assets they have, they’re really getting the wrong advice. From a retirement readiness standpoint, I think these individuals need to really get their financial houses in order, and have a comprehensive plan, not just bits and pieces from where they are at any certain company.”
Deatherage says that plan sponsors should be informed about how their recordkeeper is handling participant rollover inquiries. “If a plan sponsor is with one of the major investment firms, they should find out whether the firm is soliciting rollovers from terminated employees,” he says. “If they are, you can have that service turned off. The providers can then give the information out, but they can’t solicit the rollovers. So if the participant says they want to roll it over with the provider, then they can do it. But they can’t have their service reps on the phone soliciting that business.
“From a fiduciary standpoint, it comes down to making sure that the participant who leaves the plan gets full disclosure of what their opportunities are—the pluses and minuses. That way, they’ve received all the information: Whether they keep their money in the plan or they roll it out, they know what they are getting into. They need to be informed about all the options, in a fair and unbiased way. We know that many of the recordkeepers are going after those rollovers. Companies may not know that capturing rollovers is a huge part of the business model for these firms.”