Most agree—automatic rollover programs can help plan
sponsors deal with problems associated with small-balance accounts, including:
High levels of missing participants
Increased administrative costs and workload
Increased recordkeeping fees
Lower average account balances
Still, misconceptions persist about automatic rollovers.
Misconception No. 1:
It’s best to cash out participants with balances <$1,000
No way. This can produce large numbers of uncashed checks:
All distribution checks remain a plan asset until cashed.
The largest single source of uncashed distribution checks is
from automatic cash-outs of balances <$1,000.
A better approach:
Avoid uncashed checks by automatically rolling over balances less than
$1,000. Select an automatic rollover
provider that accepts balances less than $1,000 into a safe harbor IRA.
Misconception No. 2: Cashout rates don’t matter for
small-balance accounts
Au contraire. Small-balance cashouts have a huge impact:
Sub-$5,000 balances represent 28.5% of defined contribution
participants, and over 5 million annual job-changing participants.
A 30-year-old cashing out $1,679 nets $1,175. Had they
avoided cashing out, they’d end up with $17,926 at retirement.
EBRI estimates that plugging leakage for balances under
$5,000 has present value benefits of $1.5 trillion, system-wide.
A better approach:
Improve the odds through education and assistance. Select an automatic rollover provider who
discourages cashouts by illustrating the high cost of cashing out, and by
assisting participants in consolidating their retirement savings.
Misconception No. 3: Participants “take charge” of
savings in safe harbor IRAs
Nope. A vanishingly small percentage actually will.
<1% of all safe harbor IRA account holders will take
control and move out of the default investment.
Despite this, plan sponsors will sometimes agonize over
investment options & brokerage features available to safe harbor IRA
accountholders.
A better approach: Focus on moving safe harbor IRA balances
forward. Select an automatic rollover
provider with a solid commitment to moving balances forward, as 9 of 10
participants say portability is valuable to them (source: EBRI 2021 Retirement
Confidence Survey).
Misconception No. 4:
Miscellaneous automatic rollover fees aren’t important.
Sadly, “miscellaneous” fees can quickly devastate small
balances. In addition to annual fees and distribution fees, some automatic
rollover providers charge:
Setup fees of up to 20% of the initial balance
Account closure fees
Search fees
Paper statement fees
Escheatment fees
and more, including 275bps default investment fund fees
After two years in a safe harbor IRA, these fees can add up
to over $800! Yikes!!
A better approach:
Request, in writing, a complete list of all fees.
Misconception No. 5: A “bundled” automatic rollover
service is the best option.
Not always. An automatic rollover service “bundled” by your
TPA or recordkeeper may:
Refuse to accept balances less than $1,000.
Have extraordinarily high levels of cashouts.
Pay referral fees to third parties and make these up with
miscellaneous fees on your former participants.
Not support portability and consolidation, and even erect
barriers to exit (ex. – signature guarantees).
A better approach: Don’t be limited by “bundled” choices.
Select the most fiduciary-friendly automatic rollover option – one that applies
an enhanced standard of care for participants.
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