This is the third and final blog in the series: The Truth About Auto-Portability. The first blog examined how auto-portability works and its value proposition. The second blog scrutinized the marketing propaganda used to promote auto-portability and why you should be careful. Now that you know its business structure, intended benefits, and increased costs, time and liability, the question turns to whether there is a better solution than auto-portability to avoid early lump sum distributions and improve an individual’s financial future.

There are two alternatives that may be more successful than auto-portability in obtaining these intended benefits. The first alternative requires effort by some who are directly involved in the early stages of auto-portability. The second alternative is one that we can accomplish together as a community.

The Dreaded Distribution/Rollover Process

Even the survey data used to support auto-portability shows that most people take cash distributions because it is “the easiest option.” Auto-portability provides no help to people taking cash distributions from their retirement plans. Instead of aligning to promote auto-portability, several large recordkeepers should have collaborated on addressing the root of participants’ pain in staying connected with plan balances – the distribution and rollover process.

Someone as accomplished and distinguished as Nevin Adams procrastinated on rolling over old 401(k) balances because “…the reality was that the process of rolling over your accumulated savings has been—and in many cases remains—painful.” Mr. Adams laments how our industry is so much better at taking money in instead of sending it out. He ends by stating, “the cynic in me can’t help but wonder if that is deliberate.” That makes two of us.

The current distribution and rollover process is confusing and complex – even for an industry expert! Focusing on making the distribution and rollover process more efficient and educational is a better alternative than auto-portability – with its added fees, notices and increased liability. For example:

• Educating employees about their distribution options and benefits/consequences of each option through guides or tutorials.
• Standardizing the distribution and rollover process across institutions for consistent information gathering, option selection and funds transfer.
• Automating the rollover process (e.g., elimination of phone calls and paper forms) so employees can seamlessly move balances to new employer plans or IRAs.
• Offering self-service portals for participants to request distributions or rollovers, view status updates, and upload required documents.
• Integrating with custodians, TPAs, payroll providers and financial institutions to allow for secure data exchange and quicker fund movement with confirmation.

Unfortunately, fixing the distribution and rollover process – unlike auto-portability – is an initiative without a direct revenue stream. If those promoting auto-portability were serious about trying to “minimize cash out leakage and improve retirement outcomes,” they should have turned their focus on improving their distribution and rollover process.

Utilizing A Financial Consultant

There has been significant movement in enhancing financial literacy and wellness. A recent study found that almost 60% of workers would prefer to rely on outside experts to monitor and manage retirement savings. However, the same study shows only 35% of workers use a financial advisor. This same disconnect appeared in another study in that most people knew that working with a financial consultant is helpful, but less than half are currently working with one. Our industry should continue educational initiatives so that individuals recognize when they need an expert to assist them and how to obtain one.

The importance of selecting and retaining a financial consultant cannot be overstated. To illustrate, a financial consultant can assist during the accumulation phase when changing jobs and accounts need to be consolidated. Further, a financial consultant can assist in the decumulation phase when guidance is needed on tax planning, income replacement, insurance or annuities, Social Security, investment options, etc. Having a trusted source helps individuals connect the distribution and rollover process to their larger financial wellness strategy.

PenChecks wants to help with these initiatives. We recently launched the NextLevel IRA platform, which is advisor-centric in nature and offers both traditional and Roth IRA accounts. We believe NextLevel IRA can assist two different segments. First, the individuals in an automatic rollover IRA who want the opportunity to work with a financial consultant and have more investment options. Second, financial consultants who are restricted in helping individuals with smaller balances due to minimum account thresholds. With NextLevel IRA, financial consultants and other services providers can retain clients and attract new ones by efficiently handling low-balance accounts through a personalized path built on data, individual demographics, and retirement income goals so that the investments reflect the individual’s unique situation.

Auto-portability does not help with these initiatives. It aimlessly moves balances from one plan to another – after deducting its fee each time. There is no analysis of whether the “transfer-in” plan is better suited for the individual than the automatic rollover IRA. There is no discussion with the individual about the best solution based on their unique situation. Instead of being an automatic rollover IRA landfill, PenChecks is actively working on products that connect individuals with their money and help them work with financial consultants.

We Can Do Better

Improving individuals’ plan experiences and securing their future financial outcomes is (and should be) one of our industry’s top priorities. Currently, their plan experience is negatively impacted by the distribution and rollover process. Their future financial outcome is jeopardized by poor decisions without expert help. Auto-portability has limited application in fixing these critical issues.

A better solution is to improve the distribution and rollover process through standardization and automation. We should also stress the importance of having a financial consultant, and providing tools for those trusted sources, to assist the individuals in making informed, strategic decisions. Everyone wins if we can accomplish these goals.

About the Author

Brian Furgala, Esq., CPC, QPA is Senior Director, Retirement Services Strategy for PenChecks, a leader in outsourced retirement plan distribution processing and Automatic Rollover/Missing Participant IRAs and related services. His broad experience as an ERISA attorney and senior executive for several leading retirement plan service providers gives him a unique perspective on the industry.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.