Employees who choose to roll retirement money into an IRA risk losing key features from within the employer-provided system, which can significantly impact long-term savings goals.
These benefits include:
- Enhanced purchasing power—Because larger defined contribution (DC) plans have hundreds or thousands of participants and assets of tens of millions of dollars or more, enhanced purchasing power allows them to offer institutional class investment products to employees at a lower cost for similar products than an individual would purchase on their own in an IRA.
- Access to unbiased tools and resources—These tools often include education, modeling tools, online advice, managed accounts, lifetime income solutions and access to experienced phone representatives. Like the investments, these are usually offered a much lower cost than what is available to individuals outside of the employer system. In addition, employees who also have a defined benefit (DB) plan with their employer benefit from integrated modeling tools that allow them to better manage their retirement savings.
- Employer expertise—By participating in a qualified plan, workers benefit from the fiduciary oversight and expertise of the plan sponsor and often outside experts in areas such as selecting investment options and reviewing plan design alternatives.
To encourage employees to keep their retirement savings in the employer-provided system, Aon Hewitt encourages employers to take the following steps:
Ask the right questions.
When employers provide access to participants by any third parties, it is crucial that they understand the information and guidance that will be provided. Ask the provider to quantify the revenue generated from the different options available at retirement or termination in order to see if there are any business conflicts. Ask about the compensation and goals of the individuals who will be interacting with participants. Ask about the disclosures that will be provided regarding fees. Review agreements to determine what marketing messages can and will be sent directly to participants, and ensure that there is the appropriate level of comfort with those messages. Providers endorsed by the plan sponsor receive a heightened level of trust from workers, so it is important to make sure that trust is well placed.
Educate and communicate.
Make sure employees have access to the right information about their options, and that they receive it at the right time. This means not only at the time of retirement or termination, but well in advance to help with planning. Use multiple channels, so that employees have options across self-service vehicles, such as online information, phone, or in-person support.
Make it easier for participants to roll over money into qualified retirement plans.
The current process for rolling plan balances from one employer-provided plan to another can be complex and confusing, requiring a significant amount of paperwork and time by the employee. Employers and providers need to work together to make the process easier for participants.
"Most plan sponsors are indifferent when it comes to whether they want former employees to keep money in the plan or exit. Making it simple to roll dollars to other plans is not high on the priority list," added Borland. "Providers do not have an incentive to make it easy for money to leave them—they are losing a revenue source. We need to turn that attitude around and work together to act in the best interest of workers."