Do Automatic Rollovers Provide a Leakage Solution?

Keeping retirement funds in the retirement system

For those of us who have been involved with the development of an automatic rollover program since the concept first surfaced in EGTRRA, the fear of “leakage” has been a major concern. It is also an issue of primary concern to the U.S. Department of Labor. “Leakage” is the withdrawal of retirement savings that simply melt into the nether world of personal spending. In the world of automatic rollovers, leakage will occur when the participant takes a taxable distribution from the IRA shortly after it is funded from the plan of the former employer. 

Over the past 17 months, Centier’s Safe-Harbor-IRAAE automatic rollover program has processed approximately 20,000 accounts from more than 800 clients. This volume creates a sufficient database to examine leakage and some other interesting outcomes. 

Some basic statistics from the Centier experience are shown in Exhibit 1. 

Exhibit 1: Automatic Rollover Experience

Non-responsive and missing participant numbers are estimated based on the fact that Welcome Kits sent to those classified as non-responsive are not returned as undeliverable, while those for missing participants are returned. Additional locator searches are performed for this entire group to further verify missing or non-responsive status. 

Because of variations in plan demographics there is no useful statistic for average rollover amount. However, the mean account size has been $2,800. 

From this data, the immediate good news is leakage is not occurring to any significant degree. In fact, 97.3 percent of transfers remain in the retirement system. We also find it encouraging that an even larger relative percentage of account owners elect to transfer their funds to the qualified plan of a new employer. This tells us that they have heard the message on the importance of personal retirement savings, and are taking full advantage of the defined contribution offerings of the employer. A number of those clients retained in the automatic rollover account have started to make regular contributions to their IRA. Clearly, they are interested in building the best retirement fund they can. 

The bad news is very large numbers of “no-contacts” — non-responsive and missing participants. We can only speculate on the reasons for this disturbing outcome. Ideas advanced by myself, colleagues, other automatic rollover providers, and plan sponsors cover a full range of supposition.

• Former employees who were “short-timers” and not fully aware of their benefits and may not have paid attention during an exit interview.
• Former employees who were lower paid, less sophisticated and in need of more direction to focus on maintaining retirement savings.
• Former employees who have left the United States to be with family and friends, and forgot about or intended to abandon small plan balances.
• Former employees who are deceased and left no paper trail for family/heirs to uncover and claim vested plan balances.
• This is nothing more than proof of the overwhelming power of inertia.

For plan sponsors who have been accumulating a large number of small plan balances because they lost track of former employees, there is little that can be done regarding missing and non-responsive participants. They must rely on the automatic rollover provider to diligently seek out these participants. The ultimate goal for all of us is to get these plan balances into the hands of participants or their beneficiaries to help fund their retirement. 

Going forward, any one of these reasons, and all of them collectively, present a compelling need for plan sponsors to effectively communicate to plan participants a decision to implement automatic rollovers and the consequences of that decision. To assist with the consequences, we furnish the plan sponsor with a four-page FAQ brochure containing answers to the most common questions our client service representatives have fielded from confused (and sometimes angry) participants. We have found that the use of this brochure has reduced participant phone calls by almost 80 percent. Whether you use a brochure, letter, or other method, helping your terminating employees salvage something from their retirement savings will ultimately benefit all of us. 

Finally, there is the question of what may ultimately happen to the funds of non-responsive and missing participants. Do they escheat to the state (actually the county) of the last known residence of the account owner? Escheat can be another form of leakage. Escheat does not become an issue until the escheat waiting period has tolled (expired). The waiting period begins with the date that the account owner is first required to take a mandatory distribution. For most jurisdictions this means that the question of escheat or no escheat will arise seven years (five years in a few states) after the account owner reaches age 70BD. 

If the account owner is really missing, has abandoned his/her funds or is deceased, does escheatment represent true leakage? We believe the answer is a resounding yes. Who is to say, with finality, that a missing participant is deceased and left no potential beneficiaries, or that a non-responsive account owner has intended to abandon retirement funds? If unclaimed, escheated funds will eventually become part of the state’s budget and spent. That is the ultimate in leakage. We believe that a better result is to assert that the non-forfeiture provisions of ERISA extend to the automatic rollover. These funds should be retained in this forced IRA with the belief that a rightful owner or beneficiary will eventually lay claim to this part of their retirement security. 

Our experience fully supports the assertion that the automatic rollover regulations will help curb and not promote retirement savings leakage.