Less is More: 401(k)/403(b) Account Consolidation

The healthy dynamism that has characterized the U.S. economy over the past decade has been a tailwind for businesses of all sizes. As with any period of change and expansion, however, there have been growing pains. Employee turnover has risen sharply in the past several years, and a tightening labor market looks set to exacerbate this trend for the foreseeable future. People have opportunities, and they’re increasingly willing to move to pursue them. The average baby boomer, to this point, has changed jobs 10 times since the start of his or her career. For millennials, that figure could approach 15 by the time retirement age rolls around. Read on to learn why plan sponsors should consider account consolidation.

For retirement plan sponsors, these statistics present an important challenge: a proliferation of small 401(k) and 403(b) accounts left behind when participants change jobs. If left unaddressed, the presence of these accounts within the plan can be costly for participants and sponsors alike. The best option available for staving off the headaches associated with large numbers of inactive, small-balance accounts is consolidation. A quick look at the causes and costs of this trend can help highlight the need for an effective plan for implementing account rollovers.

Small, ‘Stranded’ Retirement Accounts: Causes

Broadly speaking, the spike in left-behind 401(k)/403(b) plans stems from three main sources.

First, the strong labor market and increased mobility of America’s workforce are making employee turnover a fact of life for most companies. This trend is even more marked in industries with traditionally high turnover rates, like hospitality or health care. Next, this sustained period of growth means that, naturally, many organizations have increased their hiring, which means that there are more participants with the potential to leave a small 401(k)/403(b) when they leave. Finally, and perhaps most importantly, the rise of auto-enrollment in employer-sponsored retirement plans lends itself to the creation of many accounts to which participants aren’t very committed. Participants who are automatically enrolled are not necessarily automatically engaged without an associated retirement education strategy, which is why higher participation rates often bring more small accounts.

Clearly, high numbers of little-used, low-balance accounts will persist if action isn’t taken to curb these trends. But why should employers care?

Small, ‘Stranded’ Retirement Accounts: Costs

The costs of these small accounts come in many different forms that can quickly add up for plan sponsors. Providers often charge higher rates for plans with lower average account balances and more participant accounts. Worse still, inactive accounts are a clear drag on retirement readiness metrics, which can hurt sponsors looking to attract and retain talent.

In addition to the obvious costs incurred by higher administrative fees with a higher number of accounts, there are also major risks involved. The Department of Labor, in its audits, is cracking down on plan sponsors who aren’t able to track down ex-participants. Fiduciary responsibility doesn’t end when an employment relationship does. A missing participant who is due benefits is a liability in the event of an audit.

Given the drag on business performance associated with a buildup of small-balance retirement accounts, plan sponsors will need to respond to the uptick if they’re to remain competitive. The easiest and most effective way to do that is to offer a clear path to consolidation.

Consolidation as a Catch-All Solution

In the context of the trend toward a more mobile workforce, mirroring this pattern by promoting true account portability just makes sense. There are several mechanisms available to plan sponsors looking to encourage both existing employees and those who are leaving to roll over their past account balances into a single, active plan.

For existing employees, working with the existing provider or contracting with an independent provider to implement a roll-in program can help build good habits and a positive association around consolidation. This is regarded as a permissible plan expense and can be well worth it should those employees ever leave and choose to initiate a rollover of their balances instead of leaving them to become a hassle for your organization.

For departing employees with balances of under $5,000, there are now automatic rollover programs available to ensure they receive the distributions to which they are entitled without any additional oversight from the sponsor. A reputable automatic rollover provider can reduce the proportion of cash-outs among small retirement accounts, a common mistake that is expensive to both the participant and the sponsor.

In the case of longer-tenured employees who walk out the door with large account balances, it’s important to have a system in place that facilitates the rollout of their assets. Having an advisory structure in place whereby participants are made aware of all their options and encouraged to roll over their retirement accounts after departure can lead to major reductions in the number of accounts left hanging when job changes occur.

Technology Has Enabled Easy and Effective ‘Auto-Portability’

It takes some initiative on the part of plan sponsors to decide to implement an effective program that promotes consolidation, but technology has made the actual transition easier than ever. Providers of auto-location services have the ability to search through active plan participants nationwide to match the addresses of inactive, abandoned 401(k) accounts to the new, active accounts that began with new employment. This can significantly reduce the problem of participants who can’t be tracked down after they leave a job. Once the identity of an ex-participant has been verified and his or her new account has been located, it’s a simple matter of making contact to offer guidance through the consolidation process.

The technology to automate the rollover process is there. While the incidence of small 401(k)/403(b) abandonment has never been higher, plan-to-plan portability has never been easier. Sponsors can manage their fiduciary responsibility and keep costs down by working with their current provider or contacting an independent provider of consolidation services or retirement plan consultant.

The upfront headache associated with setting up a process that encourages account rollovers is far outweighed by the administrative expense and hassle saved on the back end. Perhaps most importantly, however, consolidation is the right move for participants themselves. Sponsors who take steps to reduce left-behind retirement accounts can feel sure that they’re fulfilling both their moral and legal responsibility to participants.

Let PlanPILOT Help

Enlisting the help of a qualified retirement plan consultant is beneficial to plan sponsors and their plan participants. As an independent Registered Investment Advisor, PlanPILOT is not tied to any investment fund or record-keeper. We offer clients unbiased advice and assistance to control their retirement plan risks and deliver benefits effectively. Plan sponsors also rely on us to review fund lineups and provide scorecards of investments, highlighting any changes recommended. Feel free to contact us at (312) 973-4911 if you would like to learn how PlanPILOT can help with your retirement plan and plan participants.

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