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Encouraging terminating participants to leave their assets in the retirement savings system

By PS | July 01, 2016
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PS_Barry_JCiardielloJCiardiallloOn Wednesday, June 8, I testified as part of a panel before the ERISA Advisory Council. The EAC consists of 15 members appointed by the Secretary of Labor, representing labor, employers and the general public and the fields of insurance, corporate trust, actuarial counseling, investment counseling, investment management, and accounting. Each year it considers and hears testimony on selected issues and then makes recommendations to the Department of Labor (DOL). The topic of this hearing was “Participant Plan Transfers and Account Consolidation for the Advancement of Lifetime Plan Participation.”

In my view, the transition from a defined benefit (DB) to a defined contribution (DC) system presents three fundamental challenges for sponsors and policymakers: (1) getting participants to put enough money into DC plans; (2) getting participants to invest their savings efficiently; and (3) distributing benefits in a way that protects against participants outliving their assets. In our economy a fundamental element of challenge (1) (getting enough money in) is preventing retirement savings from being cashed-out every time an employee changes jobs. That is, basically, the issue the EAC was addressing at this hearing.

A terminating participant has, more or less, three choices: take her benefit in cash; roll her benefit over to an IRA; or transfer her benefit to her new employer’s plan. Currently, the easiest thing for a terminating participant to do is to take cash. The second-easiest option is typically to roll her money over to an IRA—many IRA providers have engineered the rollover process so that it is all-electronic and nearly painless.

The hardest thing to do is to roll your money over to your new employer’s plan. Revenue Ruling 2014-9 describes what the participant must in that case:

Employee A requests a distribution of her vested account balance in Plan O and elects that it be paid to Plan M in the form of a direct rollover. The trustee for Plan O distributes Employee A’s vested account balance in a direct rollover to Plan M by issuing a check payable to the trustee for Plan M for the benefit of Employee A, and provides the check to Employee A. Employee A provides the plan administrator for Plan M with the name of Employee A’s prior employer and delivers the check, with an attached check stub that identifies Plan O as the source of the funds, to the plan administrator. Employee A also certifies that the distribution from Plan O does not include after-tax contributions or amounts attributable to designated Roth contributions.  

That is a process that someone living in the 19th century might think of as “easy.” Or even rational. It’s no surprise that only a minority of participants avail themselves of this bizarre procedure. According to a 2011 AON Hewitt survey, 42% of terminating employees take cash; another 29% roll over to an IRA. (Leakage of Participants’ DC Assets:  How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income, 2011. AON Hewitt, 2011)

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