A recent Wall Street Journal article highlighted “The 401(k) Rollover Mistake That Costs Retirement Savers Billions.” That “mistake” highlighted a recent study by Vanguard that found more than a quarter of individuals who rolled over their 401(k) balance during a job change left their IRA rollover invested in nothing more than a money market fund for years, thereby foregoing tens of thousands of dollars in potential investment gains. The Vanguard study noted above claims that just being invested in a target-date fund rather than casually invested in a default money market fund could provide, on average, an increase of at least $130,000 in retirement wealth at age 65 for individuals less than age 55.
Why do so many IRA account holders leave their 401(k) rollover in cash?
Let’s face it, the process of deciding what to do with a 401(k) account at job change is complicated. The wrong decision can not only carry unexpected costs, it can also disconnect a retirement saver from the assistance of their trusted advisor, not to mention access to innovative solutions like a managed account.
Behavioral Finance Foundation
We have long embraced the lessons of behavioral finance to guide individuals to do the “right” thing when it comes to saving for retirement. For example, using automatic enrollment to make participation easier and default investment alternatives – target date funds and managed accounts – to help direct those savings to a diversified investment. In fact, it’s ironic that retirement plans typically offer little in the way of an automated solution to help individuals make the best of the most complicated decisions – their retirement savings rollover.
A growing concern is arising about the negative impact of “leakage” – distributions of retirement savings prior to retirement – and the need for options that can make it easier for participants, more efficient for plan sponsors, and still allow advisors to continue to support those accounts. It’s a process that can take things to the next level. Fortunately, new solutions are available that can not only accomplish those objectives, but do so in a seamless and cost-effective manner.
Plan Sponsor/Fiduciary Considerations
Hiring a service provider is, in and of itself, a fiduciary function; one that should be undertaken with the sole interests of plan participants and their beneficiaries in mind. It should be done prudently and with the assistance of experts if the fiduciaries lack the expertise to do so. And it should be reasonable, both with regard to the services provided and the fee associated with those services.
Ultimately, of course, that decision should be documented and the service provider(s) monitored, as would any other service adopted by the plan.
So, what would a best-in-class rollover platform look like?
For a plan sponsor/fiduciary, it should:
- Provide a seamless experience for the participant at a reasonable cost
- Be flexible enough to work with multiple recordkeeper/providers
- Address cybersecurity considerations
- Help participants make informed decisions regarding their rollover
- Provide continuity and/or transition to professionally managed investment options (TDF, managed account)
For the participant it should:
- Be “seamless” – integrated with the recordkeeping system so that the information and access by the participant is completely up to date
- Present rollover options, their benefits and costs, in a manner that can be readily understood and acted upon by the participant and their advisor
- Include an automated, integrated communication system with a series of built-in reminders regarding action steps, and a dashboard to track actions taken (or not)
- Provide access to cost-effective institutionally priced funds
- Be accessible by their trusted advisor
- Provide access to professionally managed investment options
For the advisor/recordkeeper it should:
- Include tools that allow the recordkeeper to not only help keep the advisor involved, but also foster a strong working relationship
- Permit the addition of advisor-preferred fund choices
- Provide the flexibility of a managed account option
The Decision(s)
Without question, the rollover decision – and the process that underlies it – is one of the most complex decisions a participant must make. One that is fraught with unexpected hazards ranging from exposure to market turmoil to the imposition of unexpected taxes and penalties on a premature distribution.
An integrated, best-in-class rollover solution can not only avert those numerous hazards, it can also provide a ready means for participants to preserve their retirement savings and an efficient way for advisors to continue expanding and enhancing their relationship with that participant, including access to managed account options. Furthermore, it provides a prudent mechanism for plan sponsors to fulfill their fiduciary obligations and facilitate a sound on-going working relationship with recordkeepers and advisors alike.
While there are a growing number of solutions clamoring for your attention, the one most likely to deliver on those promises will meet the criteria listed above – and prevent “the 401(k) Rollover Mistake”.
About the Author
Nevin E. Adams, JD is the former Chief Content Officer and Head of Retirement Research for the American Retirement Association. One of the retirement industry’s most prolific writers, these days he’s “retired”, which means he writes less, but continues to keep his eye on developments in, and threats to, the nation’s private retirement system. In addition to helping guide the agenda development for the NAPA 401(k) Summit, he’s also the “Nevin” in the Nevin & Fred podcast (along with renowned ERISA attorney Fred Reish), offering irreverent, but relevant perspectives on the critical issues confronting plan sponsors, advisors, and retirement industry professionals.
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.
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