By Teresa J. Leonard, QPA, QKA, ERPA, AIF® | Vice President, Retirement Plan Services | 03.01.2019
Retirement plans face demographic headwinds as the large, relatively wealthy baby boomer population heads off into the retirement sunset. Many will inevitably roll their savings out into an IRA, depleting the plans of their asset bases. The smaller the asset base, the less area over which to defray plan expenses, putting cost pressure on employers and remaining plan participants.
The options for growing plan assets are fairly limited. Besides encouraging participants to save and providing incentive to maximize their benefits, plan sponsors can also encourage new employees to roll their previously accumulated assets into the company plan, and the opportunity exists whether those assets are in an IRA or a former employer’s plan. And there are several compelling reasons why participants might want to capitalize on the opportunity.
Selling Points in Favor of One Big Account
For starters, old 401(k) accounts are at high risk of neglect, both in the sense that employees will train their primary focus on their current employer’s plan and the fact that they will no longer receive all of their former employer’s plan-related communications. Participants can streamline their investment decisions and monitoring by consolidating assets into their new plan.
Of course, expenses and investment options would need to be equivalent or an improvement for employees to consider rolling assets into their new plan.
On a more technical note, participants may find the flexibility offered by 401(k)s toward the end of their careers more appealing than IRAs.
- An employee that becomes separated from work can withdraw 401(k) assets without penalty beginning at 55 years old. Savers must wait until age 59 ½ to begin withdrawing from IRAs.
- At the other end of the spectrum, participants who continue working past 70 ½ will not be forced to take required minimum distributions from 401(k) plans. Traditional and Rollover IRA assets are required to begin distribution at that age.
A larger 401(k) account can also be helpful to participants facing financial challenges. Depending on how a plan’s services are designed, it can increase 401(k) loan qualification amounts. 401(k) savings also benefit from greater creditor protection than IRAs in the event of a bankruptcy.
Sponsors have taken note of the opportunity that inbound rollovers can offer. Callan’s 2018 Defined Contribution Trends Survey found that encouraging “rollovers in from other qualified plans” was arguably the most popular avenue for sponsors combatting “plan leakage.” 56% of respondents had already taken the step and another 27% planned to do so in 2018.
The opportunity is compelling: Inbound rollovers represent an opportunity for sponsors to grow their asset base, alleviating potential upward pressure on expenses. At the same time, sponsors can help participants streamline their retirement saving efforts in one place that offers a long list of advantageous features.
If you still have questions or concerns regarding this topic, reach out to our retirement plan team experts—we would be happy to help.