Retirement Clearinghouse utilizes technology that shifts 401(k) money with job change
Retirement experts are optimistic a new technology could help solve the age-old problem that occurs when job changers fail to roll over their 401(k) balances into a new employer's plan.
After years of groundwork, Retirement Clearinghouse LLC is close to receiving the green light from the Department of Labor to expand its auto portability program, which is expected to reduce plan leakage and missing participants.
When a participant with less than $5,000 in a 401(k) plan changes jobs and does not move his or her money, the plan can transfer the account savings into an individual retirement account. The IRAs are then typically invested in either a money market fund or certificate of deposit, which do not offer high returns. About five years ago, RCH set out to create a service that helps automatically move participants' savings back into retirement plans at their new employers.
RCH has developed a "locate, match and transfer" technology that involves periodic queries of cooperating record-keepers' systems to ascertain if the IRA owner has become a participant in an individual account plan through re-employment and then effects a transfer of funds from the individual's IRA to that new plan, according to the DOL advisory opinion.
Assets must first travel through a safe harbor IRA before transfer to a new employer plan.
The DOL issued two pieces of guidance last month. The first states that RCH has the fiduciary responsibility when the money is transferred from an IRA to a new plan, which is good news for plan sponsors and record keepers, said Michael P. Kreps, Washington-based principal at Groom Law Group, which represents RCH.
"That's consistent with what pretty much everyone thought should be the law but it's helpful that DOL clarified that," he said. "It provides plan sponsors with additional certainty that they're not taking on additional fiduciary responsibility or risk by selecting this product."
The second piece of guidance is a proposed exemption from prohibited transaction restrictions under the Employee Retirement Income Security Act. Because RCH charges a fee to participants for its service, the exemption is required.
"RCH represents that it has no financial incentives that would lead a reasonable person to believe that it is steering accounts to custodians, service providers or investment providers based on its own financial interests, as opposed to the interests of the plan participants and IRA owners," the DOL said in its proposed exemption.
The one-time fee RCH charges participants will average about $35 and can go as high as $59 for larger account balances, according to RCH.
Comments on the exemption are due Dec. 24 to the DOL, but RCH isn't expecting any major changes. "This is something where the department is 90% of the way there," Mr. Kreps said.
The DOL is expected to issue a final decision on the exemption, which will only apply to RCH, after the comment period.
A version of RCH's auto portability program launched last year with one plan sponsor — a company with about 250,000 employees that RCH has declined to name. J. Spencer Williams, founder, CEO and president of RCH in Charlotte, N.C., said the program has been a success. RCH found about 5,000 retirement plan participants who already had a safe-harbor IRA provided by RCH. Safe-harbor IRAs are created when sponsors force out terminated employees with retirement account balances of less than $5,000.
The 5,000 participants were invited to transfer their IRA balances into the company's retirement plan and roughly 1,000 have given their consent to do so. The consent is needed because the DOL exemption has yet to be granted.
"The objective was that we wanted to put a demonstrable, measurable model in place so that anyone who might be skeptical that auto portability would work, we could just turn to this pilot and say, 'actually it is working,'" Mr. Williams said.
While RCH has been appealing to the DOL for legal guidance, it has been in regular contact with major record keepers, Mr. Williams added. "It's too soon for us to make any announcements, but the goal is to get a couple record keepers together to launch it and then build from there," he said.
Although plan sponsors who use RCH's service will not have fiduciary responsibility when money is transferred from a participant's IRA, sponsors are still the fiduciaries when selecting RCH. Plan executives are responsible for ensuring the RCH program is a "necessary service, a reasonable arrangement and the compensation received is no more than reasonable" under ERISA, the DOL stated in the proposed exemption.
Will Hansen, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, said he's appreciative of DOL and RCH efforts to reduce plan leakage, but said plan sponsors will still have concerns. "By accepting the service does this open up a new gateway of lawsuits occurring?" he asked. "It's probably top of mind for a lot of plan sponsors."
Marcia S. Wagner, founder and managing partner at The Wagner Law Group, Boston, said the selection of any service provider with respect to a plan must be done prudently and, to avoid a prohibited transaction, the payment for the service must be reasonable and the service must be necessary. "If the plan sponsor exercises appropriate procedural and substantive due diligence in selecting RCH, it will be difficult for a plaintiff successfully to challenge the selection," she said.
Alicia H. Munnell, director of the Center for Retirement Research at Boston College, said she's delighted by the DOL guidance and said the technology will reduce plan leakage.
"A job change is one of the main reasons people cash out their accumulations," she said. "To stop that process is an important goal, and I think they have a good idea and they've had the technology available for a long time and have been waiting for approval."
According to RCH's auto portability simulation, which uses data from the Employee Benefit Research Institute in Washington, there are an estimated 5.3 million defined contribution plan participants with balances of less than $5,000 who change jobs every year. Moreover, about 4 million of those job changers eventually will cash out their plans. Auto portability would reduce these cashouts by more than 50% on an annual basis, according to the simulation. Cashouts will never be reduced by 100%, since there is a natural cashout "floor" represented by cashouts that occur due to a true financial emergency, according to RCH.
"They're shooting themselves in the proverbial retirement foot," Mr. Williams said of participants who cash out.
From 2004 to 2013, separated employees left more than 16 million accounts of $5,000 or less in workplace plans, with an aggregate value of $8.5 billion, according to a 2014 U.S. Government Accountability Office report citing data from the Social Security Administration.
"Our goal was to totally reverse the flow of these bad outcomes and turn them into good outcomes through this default mechanism," Mr. Williams said of cashouts and money placed in safe-harbor IRAs.
Finding the missing
Moreover, auto portability and its locate-and-match technology will reduce the number of missing participants, Mr. Kreps said. "Having that technology in place will have broader applications, including helping to track down missing participants in a more efficient and cost-effective way," he said.
Lynn Dudley, senior vice president for global retirement and compensation policy with the American Benefits Council in Washington, called the DOL's action a step in the right direction. "This allows the private sector to get out there and get to solving this problem," she said.
The DOL has left the door open to issue other companies similar exemptions so long as they agree to the same guidelines as RCH, such as accepting fiduciary responsibility and making sure participants get adequate notification of an impending transaction and have the option to opt out.
"No good idea gets left alone," Ms. Dudley said. "Competition is a good thing."
Mr. Williams invited the competition. "Anybody else can jump on in," he said. "They need to spend the amount of time and energy and resources that we have to get there, but this is business."