Defined contribution plan executives are divided over whether to retain assets of retirees and former employees in their plans or let these participants take their money elsewhere.
Results from recent surveys and interviews with consultants illustrate common themes among both the pro-retention and anti-retention groups. They also show that many sponsors lack a clear policy about asset retention, thus enabling record keepers to actively promote their rollover IRA business to participants.
The group that encourages keeping the assets is likely to include employers with a sense of paternalism, actively trying to educate employees about saving for retirement, the consultants say. These plans often have longer-tenured employees with larger account balances. By keeping more assets in their plans, the sponsors create more economies of scale and more bargaining power in negotiations with providers for reduced fees, lower-cost share classes and more services.
“Nothing happens automatically,” said Michael Kozemchak, managing director at Institutional Investment Consulting, Bloomfield Hills, Mich., who encourages clients to consider keeping assets of retirees and ex-employees in their plans. “We trumpet the theme of communication to elevate consumer awareness. That requires a concerted marketing effort to show participants the impact over the long term.”
Sponsors that do little or nothing to keep retirees' and ex-employees' money in their plans are likely to have higher employee turnover and many retirement accounts with modest or small balances. Plan executives view keeping these accounts as an administrative headache and a potential legal liability.
These sponsors “are less focused on retirement as a benefit,” said Alison Borland, vice president for retirement solutions and strategies at Aon Hewitt, Lincolnshire, Ill. “They just do it to remain competitive.”
The administration-cost argument “is flawed if the participants have large balances,” she said. “It only makes sense if the people have small balances.”
Ms. Borland said litigation fear is based on plan executives' belief that retirees and former employees would be more likely to sue the company than would current employees. So sponsors that harbor litigation fear are glad to see former employees go.
An Aon Hewitt survey of 362 DC plan executives, published in January, found 20% preferred to keep retiree and ex-employee assets in the plan while 17% preferred they transfer the money into an IRA. The rest didn't have a preference.
An annual survey of 103 DC plan executives by Callan Associates, published in January, said 57% of plans have a specific policy on dealing with assets of retirees and ex-employees, while 43% have no policy.
Among sponsors with policies, 44.7% don't seek to retain these assets while 40.4% do, the survey said. In addition, 2.1% said they seek to retain only retirees' assets and 12.8% specifically don't seek retirees' money.
Without a policy, plan participants are subject to marketing by record keepers who want retirees and departing employees to roll over their assets into an individual retirement account, said Lori Lucas, executive vice president and defined contribution practice leader for Callan Associates in Chicago. “A lot of providers say right up front that they will pursue a rollover IRA business.”
Some providers will say that if departing participants cannot be pursued for their rollover IRA business, “it doesn't work with their business model” and they may not bid on an RFP, said Ms. Lucas. She declined to identify the record keepers.
Companies that actively encourage asset retention among participants cite fees that are lower in the plan than they would be in an IRA, Ms. Lucas said. They discuss options — such as stable value — that aren't available in IRAs, she said.
Mr. Kozemchak recommends that clients wanting to retain assets of departing participants should demonstrate “the company cares” about their retirement. His firm prepares a cost comparison matching the plan's expenses vs. a peer plan's expenses vs. the cost of a retail IRA.
In an April survey of DC consultants, 53% said that although most or some of their clients preferred to keep retirees' assets in their plans, they didn't actively encourage retention, said Stacy Schaus, executive vice president and defined contribution practice leader of Newport Beach, Calif.-based Pacific Investment Management Co., which conducted the survey. Twenty-eight percent said most or some of their clients actively sought to retain the assets.
“If sponsors want people to stay, they need to make it clear what the advantages are, and they need to make it easy for them to do it,” Ms. Schaus said.
Consultants say the debate over plans' asset-retention activities could be affected by two issues: a response by Congress and federal regulators to the recent report by the Government Accountability Office on rollovers from 401(k) plans; and the impending new Labor Department regulation defining a fiduciary.
The GAO report “crystallized the conflicts and competing interests” of record keepers that also offer rollover IRA services, said Mr. Kozemchak. The GAO report recommended, among other things, that that the Labor Department and the Internal Revenue Service improve disclosures by providers, simplify the procedures of plan-to-plan rollovers and develop standard guidance about distribution options for 401(k) participants leaving an employer (Pensions & Investments, April 15).
The Labor Department is expected to issue an updated proposed rule on fiduciaries, amending the Employee Retirement Income Security Act definition. Expanding the scope “could have a significant impact,” said Ms. Borland. “It could encourage sponsors to be more proactive in education and guidance (of participants). It could lead to keeping more assets in plans.”