Ensuring the Effectiveness of an Asset Retention Strategy

Asset Retention Review

Is Your Recordkeeper Undermining Your Initiatives?

Attitudes about employer-sponsored retirement plans’ retaining the assets of terminated employees are starting to change. This change in attitudes has some obvious implications for plan design. The change also has some (subtler) implications for employer oversight of recordkeeper practices.

Retaining Assets: the Buzz
First, let’s discuss the shift in attitudes regarding the retention of assets.

As a starting point, please note that this discussion about the desirability of retaining assets does not represent a change in attitudes regarding smaller balances (of under $5,000). Employers, generally, remain eager to distribute those smaller balances. Rather, we are focused on larger balances — such as those of retirees and long-service employees — that can be in the hundreds of thousands of dollars.

As noted by Alight it its 2019 Hot Topics in Retirement and Financial Security report, 33% of employers prefer that terminated employees keep their balances in the employer sponsored plan, while only 5% of employers prefer that participants remove their balances from the plan when they stop working for the company. According to Alight, over the past five years the percentage of employers favoring removal of assets by former employees dropped from 11% to the (current) 5% response.

Similarly, Callan, in its survey on 2019 Defined Contribution Trends noted that (of the employers with a policy regarding the retention of the assets of retirees and terminated employees) 69% sought to retain assets.

What’s Behind the Shift?
Employer attitudes toward the retention of assets can be attributed to financial, philosophical and fiduciary reasons.

•      From a financial perspective, retention of large balances can help a plan negotiate better fee arrangements from providers. As noted in Alight’s new study on the treatment of post-termination distributions (What do workers do with their retirement savings after they leave their employers?):

A large exodus of dollars leaving the plan can negatively affect the plan sponsor’s ability to obtain and maintain optimal pricing from asset managers, trustees and some plan recordkeepers. To the extent the plan’s collective purchasing power is eroded, this could ultimately result in higher fees for all participants.

Similarly, as noted in a recent article in Pensions & Investments (More plans looking to hang on to assets of departing workers), the loss of assets of retirees and former employees can affect fee arrangements with recordkeepers and the investment options available within a plan.

•      From a philosophical perspective, employers are increasingly recognizing that the value provided in the employer-sponsored plans (such as lower costs and professional oversight of investments) should be extended to former employees. Indeed, turning large balances over to the retail market risks undermining the retirement income achievements of the employer-sponsored-plan.

•      Allowing recordkeepers (and other plan providers) to use their access to plan participants in order to steer those participants into IRAs and proprietary financial products represents a fiduciary risk to the plan. As noted by Alight in its report on Benchmarking 401(k) rollover behavior:

The fiduciary duties under ERISA apply to all participants in the plan, whether they are actively employed or terminated. Recent headlines show that the Department of Labor has been investigating the rollover practices of a large financial services institution that has a 401(k) recordkeeping service to determine whether the institution was steering individuals from low-cost 401(k) plans to higher-cost IRAs.

What are Employers Doing?
Employer strategies for retaining assets can include a variety of initiatives, including
•      More retiree-friendly distribution options, such as ad hoc payments or more flexible installment options;
•      Facilitating the roll-in of assets from IRAs or other retirement plans, to help participants (including, in some instances, former employees) consolidate their retirement savings;
•      Communication about plan features and the benefits of retaining assets in the employer plan.
•      Permitting terminated employees to continue loan repayments, to avoid loan defaults and taxable distributions.

These strategies can pay off. As noted in the Pensions & Investments article, the Ohio Public Employees Deferred Compensation Plan has tripled its assets (by actively pursuing roll-ins) and been able to utilize lower-cost share classes, saving the plan $4.6 million annually.

What are Employers Not Doing?
The discussions regarding the retention of assets are missing one key component: addressing the challenge posed by conflicted recordkeepers and other providers, who may engage in practices that, in effect, actively undermine employer efforts to retain assets. As noted in our recent blog post (The Lure of the IRA and the Power of the Inherent Conflict), some recordkeepers have tremendous financial incentives to attract rollovers from plan participants (either entering the plan with assets from a prior employer or terminating employment). Moreover, these recordkeepers have fine-tuned their procedures and communications to attract rollovers away from employer-sponsored plans.

So, the question for employers seeking to retain more assets: have you assessed your recordkeeper’s practices and procedures to see if your recordkeeper is undermining your asset retention strategy? For example:

•      Have you reviewed written material or call center scripts for new employees (with assets to be rolled in) or current employees (eligible for a non-taxable distribution)?
•      Have you monitored nontaxable distributions from your plan to see whether your recordkeeper is receiving a disproportionate share of these distributions?
•      Have you reviewed your recordkeeper’s compensation structure, to see if representatives receive bonuses or other payments for rollovers into IRAs or other proprietary financial products?

An asset retention policy can represent an important plan initiative and can help participants achieve significant benefits by staying in an employer-sponsored plan. However, all of the plan design changes in the world will have little impact if the recordkeeper–an entity with access to participants and their trust–has economic incentives to undermine that initiative.

As discussed in the reports and articles noted throughout this blog, employers have a number of reasons to pursue an asset retention strategy. Any employer seeking to implement an asset retention strategy should include, in that strategy, a clear understanding of what the plan recordkeeper will do to support — and not undermine — that strategy.