How To Evaluate Auto Rollover IRA Providers (Including Those Related To Auto-Portability)

An article promoting auto-portability compared “traditional” automatic rollover IRAs to a landfill where those small balances languish and go unclaimed by accountholders. The “traditional” label was used to distinguish those automatic rollover IRAs from the auto-portability process. However, the auto-portability process also uses automatic rollover IRAs. In fact, the law requires the use of automatic rollover IRAs during the auto-portability process.

To avoid being a landfill where small balances languish, automatic rollover IRAs – whether “traditional” or related to auto-portability – should be evaluated using the following three criteria. These criteria ensure that individuals aren’t charged excessive fees, earn a reasonable rate of return and have access to their money and information to make better financial decisions.

Fees

As with any product or service, price matters. There can be various fees associated with an automatic rollover IRA provider: set-up or initiation, ongoing maintenance, closing, etc. Most, if not all, of these fees are paid by the individual. Make sure that you review and consider all fees to determine the full effect on those individuals.

Be careful to scrutinize any add-on fees that may be considered unreasonable. For example, fees for paper statements or escheatment fees. In addition, be careful of how the providers charge their maintenance fees. Is it annually or monthly? If an individual is charged a $45 annual fee, but then claims their account in the first month, the individual has paid a fee to maintain an account that is not active for most of that time period. On the other hand, if the same individual is charged a $3.75 monthly fee, when they claim their account in the first month, the individual only pays $3.75 to maintain the account when it was active.

Finally, plans utilizing auto-portability likely have an added fee for transferring balances from the automatic rollover IRA to the new employer’s plan. Such a fee would not be charged by “traditional” automatic rollover IRAs. It is crucial to review all fees charged and their frequency in assessing whether the automatic rollover IRA provider is charging a reasonable fee for the services provided.

Investment Return

You should inquire about the average earning rate for automatic rollover IRAs – even those associated with auto-portability. Pursuant to DOL regulations, the balances must be held in investment products designed to preserve principal and provide a reasonable rate of return consistent with liquidity. But that doesn’t mean it has to be in an interest-bearing bank account.

Balances can remain in automatic rollover IRAs for extended periods of time, even with the auto-portability feature. For example, auto-portability requires at least a 60-day notice period before balances can be moved from the automatic rollover IRA to the new employer’s plan. That time period is after the individual has met the eligibility conditions of the new employer’s plan and the auto-portability query identifies the match. Balances can remain in an automatic rollover IRA for over a year even with a successful auto-portability feature.

You should evaluate the different investments products used by various providers, such as money market accounts or stable value funds. Compare them to ensure individuals receive a reasonable rate of return prior to being re-connected with their money. At the same time, verify that the investment products have liquidity and benefit-sensitive features to allow individuals unrestricted access to their balances.

Success In Re-Uniting Individuals With Their Money

Automatic rollover IRAs are intended to be temporary, not final destinations. It is up to the provider to actively search for and communicate with individuals who have automatic rollover IRAs. Further, the individuals’ ability to claim their funds should be convenient and efficient.

Auto-portability’s solution is to mindlessly transfer balances – after deducting fees – from the old plan to an automatic rollover IRA to the new plan. This cycle may happen several times based on the number of jobs an individual has over their working career. Individuals should be actively involved in deciding how and when to move their money. Instead of auto-portability, the distribution/rollover process should be made easier and education should continue to improve for better decision-making.

You should ask the providers about their success rate in re-uniting people with their money. Further, inquire about the methods and solutions available to individuals in making better financial decisions. For example, does the provider help educate individuals on their distribution options and facilitate their selection process? Some providers may have a voluntary IRA offering allowing individuals to continue using a tax-deferred account while working with a financial consultant and having more investment options.

Choose Wisely

Evaluating automatic rollover IRAs is important because the selection is a fiduciary decision. Automatic rollover IRA providers can have vastly different business models or features. Even if you are considering or utilizing auto-portability, there is still an associated automatic rollover IRA provider which should be reviewed.

Until all individuals make timely decisions upon leaving an employer, force-out distributions will be part of retirement plan administration. Choosing the best automatic rollover IRA provider will safeguard their money until those individuals come forward to be re-connected with their money.

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.