Small retirement accounts have been a big problem for a long time, as they tend to become forgotten and contribute to challenges related to missing participants, cash leakage, and, of course, sub-optimal participant outcomes. Help has been in the works, especially in the form of auto portability, which makes so much sense for both sponsors and savers.
Progress Badly Needed
Dollars languishing in small retirement accounts are clearly bad for participants–and they pose significant risks for plan sponsors too, especially given Department of Labor
Missing participants, excessive cashout leakage, forgotten accounts and uncashed distribution checks are all sub-optimal participant outcomes closely linked with the proliferation of small-balance, inactive retirement savings accounts, which typically occur when short-tenured participants change jobs.Each year, approximately 6 million defined contribution account holders will change jobs with an account balance of less than $5,000. Of these:
- Only 6% will proactively move their funds to another IRA or to a new employer’s plan.
- 55% will immediately cash out completely.
- 39% will have their balances automatically rolled over to a safe harbor IRA, exposing their savings to money market returns, predatory fee arrangements and barriers to exit.
- Every year thereafter, 6-12% of these safe harbor IRA account holders will continue to cash out or allow fees to erode their balance to zero….
- In 2020, EBRI data suggested that there may be as many as 8.1 million legacy safe harbor IRAs, languishing in 100% money market funds.
Thankfully, a focus on auto portability throughout the retirement industry can make a difference, by reducing the number of small balance accounts, facilitating the preservation and consolidation of savings, and decreasing cash outs and “dead-end safe harbor IRAs.” According to Hawkins optimism is in the air largely due to the Portability Services Network (PSN), a collaboration “of the largest defined contribution recordkeepers dedicated to accelerating the adoption of auto portability.” Given the participation of over 63% of the “defined contribution market,” encompassing about 82 million workers from 185,000 employer-sponsored plans, the PSN is expected to make a significant dent in the problems associated with small balance accounts:
When operations commence, auto portability will begin to match inactive, small-balance accounts with active, current-employer accounts and will automatically transfer those accounts to a current-employer plan.The power of auto portability, when combined with the reach of the PSN network, will produce nothing short of a revolution for future, job-changing participants whose small-account balances are subject to their plan’s automatic rollover provisions. For these participants, the best choice—consolidation—will also become the default choice, leading to dramatic reductions in cash out leakage and increased retirement security.
Hawkins also points out that there is hope for the 8.1 million retirement account holders who have balances languishing in “legacy safe harbor IRAs,” via a program initiative being undertaken by Vanguard to “reconnect IRA holders with retirement funds they may have lost or forgotten. The consolidation of these accounts, which are often left behind when employees change jobs, will help IRA holders preserve and maximize retirement assets.” Ensuring participants benefit from plans is of course the goal–and duty–of retirement plan sponsors. While working to reduce the problems associated with small account balances, it is also a wise idea for sponsors to improve their own protection plans. No plan sponsor wants to face even the allegation of a fiduciary breach alone: a defense attorney with ERISA expertise costs about $600–per hour. Obtain protection from Colonial, where a whole year of Fiduciary Liability coverage is less than one hour with that lawyer if a crisis hits. Plus, we even include Cyber Liability coverage to protect your business and retirement plan in the event of a cyber breach. Since cyber breaches can quickly escalate into fiduciary breaches, our efficient and effective coverage is the sensible solution for plan sponsors across the country:
Good To Do: Catch Up!
Ultimately, retirement plan sponsors are responsible for ensuring that all plan participants receive their benefits on schedule. Because missing participants pose chronic and serious challenges to the effectiveness of retirement plans, regulators at both the IRS and the DOL have been urging plan sponsors to step up their related efforts. Specifically,the Department of Labor encourages proactive attention to the associated problems. Specifically, in 2021, the Employee Benefits Security Administration (EBSA) instructed retirement plan fiduciaries to: Maintain complete and accurate census information; Communicate with participants and beneficiaries about their benefit eligibility; and, Implement effective policies and procedures to locate missing participants and beneficiaries. Plan sponsors will find it helpful to brush up on EBSA’s guidance in three parts, which is available right here: Best Practices; Compliance Assistance; and, Field Assistance Bulletin.
Of course acting on federal guidance is critical, but plan sponsors are never free from the risks associated with a fiduciary breach. That’s why Colonial Surety is here to help. For just a few dollars a day, you can be covered in the event of claims of alleged or actual breaches of duty in connection with the employee retirement plan. Colonial’s fiduciary liability insurance includes defense costs and penalty limits up to $1,000,000. Uniquely, Colonial even includes Cyber Liability Insurance for the plan and business, locks in multi-year rates, and offers installation payments. Be wise: protect yourself and your business now:
Pension Plan Professional?
Let Colonial help you make sure your plan sponsor clients have the coverage they need. Of course we have got you covered too! From Errors and Omissions Insurance to Fiduciary Liability Insurance, Employment Practices Liability Insurance–and more, we’re HERE with the coverages pension professionals need to keep the business going—and growing.
Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.