Don’t Roll Over

A recent GAO report titled, “Labor and IRS Could Improve the Rollover Process for Participants” was presented at the last Defined Contribution Institutional Investment Association (DCIIA) Public Policy Forum.  The report’s key finding was that 95% of roll-over dollars went into traditional IRAs even though rolling dollars into a new employer’s plan would represent a better solution for many participants.  But, as the “Mapping the Mindset” whitepaper from ING noted: “One of the greatest misconceptions about retirement consumers, and how they plan and invest, is that retirement planning is a rational process.”

The benefits of consolidating defined contribution DC plans for participants are plenty: simplified investment management and allocation, removal of redundant fees, and the value added services wrapped in modern 401K plans.

Barriers to roll-ins for participants are plenty, as well:  lack of industry standard process, gaps in regulatory requirements (especially in the timing of communications), and confusion or imperfect information on the part of participants.

The challenges for the DC industry are weak incentives for existing providers and disincentives for receiving plans, including perceived risk of accepting non-qualified funds and the costs involved for attracting and processing low balance accounts.  As the GAO report’s title indicates, the proposed path forward includes more guidance and rules from Labor and the IRS.

Groups like DCIIA undoubtedly are working to pro-actively propose standardized processes and inform the ultimate direction of Labor and the IRS.  Individual organizations in the DC ecosystem should also be participating in and preparing for the likely changes that are coming.  Determining expected impacts to current operating models, compliance costs, and participant behavior can reveal both opportunities for differentiation and exposure to new risks.  Armed with this analysis, the organization can then both participate in and prepare for the changes that are coming.  And, in the end, participants may begin rationalizing roll-ins instead of roll-overs.

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