A report just released by the U.S. Government Accountability Office (GAO), “401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants,” showed that the current 401(k) rollover system is complex, confusing, lacks consistency and favors moving money into individual retirement accounts (IRAs). Aon Hewitt agrees with the GAO’s findings and recommendations and urges companies to help workers reach their retirement savings goals by encouraging them to keep retirement dollars in the employer-provided retirement system. According to Aon Hewitt, employees who roll plan balances into retail accounts without fully understanding their options significantly increase their risk of not meeting their financial needs in retirement.
“The GAO’s report brings to light very real problems with the current rollover system,” said Alison Borland, vice president Retirement Solutions and Strategies at Aon Hewitt. “Keeping retirement dollars in the employer-provided system is paramount to helping workers ensure that they are adequately prepared for retirement, and we have long been concerned about the difficult process workers face when trying to roll one employer 401(k) plan into another. Aon Hewitt believes the GAO recommendations for improving the rollover process would go a long way to ensure that workers’ best-interest and financial security is a top priority for employers and plan providers.”
According to Aon Hewitt, many workers do not intuitively understand the advantages of keeping retirement savings dollars in the employer-provided system and do not have a trusted source of clear, understandable, unbiased education about their options. Consequently, it is crucial for employers to educate and communicate with employees about the benefit of participating in a qualified plan—and to ensure the information being provided to employees by third parties with whom they have a relationship is fair, unbiased and in the best interest of plan participants.
Employees who choose to roll retirement money into an IRA risk losing key features from within the employer-provided system, which can significantly impact long-term savings goals.
These benefits include:
– Enhanced purchasing power—Because larger defined contribution (DC) plans have hundreds or thousands of participants and assets of tens of millions of dollars or more, enhanced purchasing power allows them to offer institutional class investment products to employees at a lower cost for similar products than an individual would purchase on their own in an IRA.
– Access to unbiased tools and resources—These tools often include education, modeling tools, online advice, managed accounts, lifetime income solutions and access to experienced phone representatives. Like the investments, these are usually offered a much lower cost than what is available to individuals outside of the employer system. In addition, employees who also have a defined benefit (DB) plan with their employer benefit from integrated modeling tools that allow them to better manage their retirement savings.
– Employer expertise—By participating in a qualified plan, workers benefit from the fiduciary oversight and expertise of the plan sponsor and often outside experts in areas such as selecting investment options and reviewing plan design alternatives.
To encourage employees to keep their retirement savings in the employer-provided system, Aon Hewitt encourages employers to take the following steps:
Ask the right questions. When employers provide access to participants by any third parties, it is crucial that they understand the information and guidance that will be provided. Ask the provider to quantify the revenue generated from the different options available at retirement or termination in order to see if there are any business conflicts. Ask about the compensation and goals of the individuals who will be interacting with participants. Ask about the disclosures that will be provided regarding fees. Review agreements to determine what marketing messages can and will be sent directly to participants, and ensure that there is the appropriate level of comfort with those messages. Providers endorsed by the plan sponsor receive a heightened level of trust from workers, so it is important to make sure that trust is well placed.
Educate and communicate. Make sure employees have access to the right information about their options, and that they receive it at the right time. This means not only at the time of retirement or termination, but well in advance to help with planning. Use multiple channels, so that employees have options across self-service vehicles, such as online information, phone, or in-person support.
Make it easier for participants to roll over money into qualified retirement plans. The current process for rolling plan balances from one employer-provided plan to another can be complex and confusing, requiring a significant amount of paperwork and time by the employee. Employers and providers need to work together to make the process easier for participants.
“Most plan sponsors are indifferent when it comes to whether they want former employees to keep money in the plan or exit. Making it simple to roll dollars to other plans is not high on the priority list,” added Borland. “Providers do not have an incentive to make it easy for money to leave them—they are losing a revenue source. We need to turn that attitude around and work together to act in the best interest of workers.”
To simplify the process Aon Hewitt suggests plan sponsors and providers work together to make the process less arduous for employees. For example, periodically, and at an employee’s termination, employees could be provided with resource materials or an educational campaign explaining the benefits of employer-provided plans, with clear and simple instructions on how to roll one plan into another. Plan sponsors could post this information on provider web sites along with phone numbers and web links for help.
Maintain an attractive investment line-up. One of the main reasons that IRA providers encourage rollovers out of an employer plan is because of lack of breadth of available investments compared to an IRA. Plan sponsors can help employees make the most of their retirement dollars by offering low-cost institutional core investment options, complemented by a self-directed brokerage (SDBA) option that provides access to the broad universe of mutual fund alternatives.
Offer an attractive retirement income option for those nearing retirement. Aon Hewitt’s research shows that 29 percent of plans currently provide employees with some form of retirement income solution, either inside, or outside the plan. Including easy and flexible monthly payments, income planning and investment help and/or annuity options would give employees nearing retirement an added incentive to stay within the employer-provided system.