Good news. The Department of Labor,
with its request for public comment,
may be about to give Retirement Clearinghouse LLC the green light to proceed
with its proposal to automatically transfer small balances from one 401(k) to
another. Such an arrangement would dramatically reduce leakages from 401(k)
Millions of Americans leave their
jobs each year and cash out their holdings, because it can be difficult to roll
money from one 401(k) to another. Others leave their money in the plan, but
fail to specify what should be done with their balances. If the balances are
small (less than $5,000), employers can transfer them into an IRA account,
where they are invested in money market funds. Such accounts can have fees that
exceed their low investment returns, causing account balances to decline.
Many years ago, Spencer Williams and
Tom Johnson came up with a solution: automatically consolidate small accounts
so that employees can aggregate their savings as they change jobs. They created
Clearinghouse LLC to serve as the platform to consolidate balances.
Consolidation helps the employees accumulate a more adequate level of
retirement saving, because research shows that hitting the $20,000 milestone
makes participants much more likely to preserve their balances. And
consolidation helps sponsors fulfill their fiduciary duty and cut aggregate
plan costs by reducing the number of stranded accounts. Consolidation helps
providers to increase assets under management and reduce the headaches associated
with mandatory distributions, stranded accounts, and uncashed checks for
Williams and Johnson have
demonstrated that consolidation is feasible and has a big payoff. They worked
with a large health care company with more than 190,000 participants and an
average turnover of more than 40,000 employees each year. To control costs and
better serve employees, the health care company instituted a “roll in” program
as a fringe benefit to help new or current employees consolidate their savings
in the company’s plan or to help departing employees move their savings to the
plan of the next employer.
According to a report from the
Boston Research Group, the plan saved $6 million in costs and
increased assets under management by $100 million, and participants on average
rolled about $18,000 into their accounts, which greatly reduced subsequent
While Retirement Clearinghouse has
the technology to provide automatic roll ins, it needs buy-in from government
regulators for two reasons.
First, potential customers wanted
clarification as to who has fiduciary responsibility for this service. A DOL
advisory opinion clarified that Retirement Clearinghouse is the fiduciary for
Second, the Employee Retirement
Income Security Act of 1974 prohibits fiduciaries from self-dealing. That is,
fiduciaries are not allowed to earn fees as a result of their recommendations.
Retirement Clearinghouse has asked the DOL for an exemption from this
provision, and the DOL has asked for public comment before it proceeds.
Retirement Clearinghouse envisions
charging a few dollars per month in custodial fees for the holding period
between plans and a maximum $59 fee for the electronic transfer to a new plan.
The goal is to keep the small balances in an IRA for as short a period as
possible before transferring them to a new plan.
The cashing out and loss of small
accounts is a well-defined and serious problem. Retirement Clearinghouse — and
hopefully other companies out there — have a solution. It is so lovely to see a
win for the 401(k) system.
here for the original article.