PLANADVISER - September/October 2019 - 4

editor's letter
They Should Take It With Them
L
ike many in our industry, I've long been a proponent of helping people help themselves
when it comes to saving and investing. When the Economic Growth Tax Relief Reconciliation
Act (EGTRRA) was passed in 2001, creating the provision for a safe harbor
individual retirement account (IRA), I thought it was a great idea: Via these accounts,
employer-sponsored, qualified plans would now be able to make automatic distributions to
terminated employees, without their consent, for balances under $5,000. The Department
of Labor (DOL) rule applied for distributions starting in 2005, and since then many participants'
savings have been moved to these IRAs. Spencer Williams, founder, president and
CEO of Retirement Clearinghouse, estimates there are 5.5 million such rollovers annually.
Unfortunately, in practice, this safe harbor still comes up short.
While safe harbor IRAs keep the money qualified for terminating participants, many of
these assets lose their qualified status-in fact, 75% of participants cash out within three
years. Once out of the system, this money gets diminished, by the taxes and early withdrawal
penalties, the result being less earnings saved than if the person had never deferred.
But just because this idea hasn't helped as anticipated doesn't mean the motive was
wrong. Its goal was excellent: to protect the assets of participants, especially to keep that
money growing as they travel from job to job.
So, what can be done to improve on the idea piloted in EGTRRA of trying to protect small
balances? There is a viable solution that I find intriguing, that has been cleared by the DOL
but needs industry support.
I'm referring to auto-portability, which comes to us from Retirement Clearinghouse,
formerly RolloverSystems. Auto-portability is a standardized, automated movement of
an inactive participant's retirement account of $5,000 or less from his former employer's
retirement plan to his active account in a new employer's plan.
Last November, the DOL issued an advisory opinion on auto-portability, offering a safe
harbor for plan sponsors and recordkeepers that pursued this course of action, by naming
Retirement Clearinghouse as the fiduciary. It followed that up by issuing a final prohibited
transaction exemption (PTE) for automatic portability, removing the requirement that
participants consent to have their small balance of $5,000 or less in a safe harbor IRA automatically
rolled into their new employer's retirement plan.
This can have dramatic implications: Within a three-year period, 85% of participants
who leave one plan go to an employer that also offers a defined contribution (DC) plan;
two-thirds move to such an employer immediately. In its first pilot program with one U.S.
employer of 250,000 employees, Retirement Clearinghouse matched the employer's records
of those workers against the couple hundred thousand small-balance IRAs for which Retirement
Clearinghouse is the recordkeeper. It found 6,500 matches where participants had
both accounts, and, of those, 1,300 gave Retirement Clearinghouse their consent to have
their small IRA balance moved into their 401(k). As we know with the provisions of the
Pension Protection Act of 2006 (PPA), if this was done automatically, most of the 6,500 would
have kept their money in the plan instead of the minority that affirmatively elected it.
However, for this program to be successful, it takes advocacy to get recordkeepers and
plan sponsors to sign on.
Sponsors can't offer this until the recordkeepers do, and this is where advisers come
in. Advisers are in a unique position to act as catalysts for auto-portability to become an
offering. With your relationships across the industry, on both the plan sponsor and recordkeeper
sides, you can be the advocate for recordkeepers to sign on and help participants
aggregate balances. You can encourage participants to ask their providers about it, and talk
up the benefits of the DOL guidance that protects sponsors when they make this election.
In my estimation, for an industry on outcomes, this concept seems like a no-brainer to
embrace. For recordkeepers, this isn't about losing assets. This is about looking at what is
best for participants. Plan sponsors are already rolling these small balances into IRAs. Isn't
this a dramatically better option to kick-start a person saving in a new plan at a new job?
-Alison Cooke Mintzer, Editor-In-Chief
Advisers are
in a unique
position to act
as catalysts for
auto-portability
to become
an offering.
4 | planadviser.com September-October 2019

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PLANADVISER - September/October 2019

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