Necessity Drives Adoption of Automatic Rollovers
Several factors, like the proliferation of automatic enrollment, have helped Automatic Rollover IRAs become a fiduciary best practice. This is the second in a series of five sneak peaks from the new whitepaper, Automatic Rollover IRAs: From Legislative Footnote to Fiduciary Best Practice.
For decades, plan sponsors, plan service providers, and advisors offered education and guidance, but employees and participants often failed to act on the information provided. As a result, when experts in behavioral finance theorized that employee inertia could be used to improve retirement outcomes, the industry was receptive to the idea.
In early 2018, an industry-wide survey asked what development has improved retirement outcomes the most. The top answer was the adoption of automatic enrollment by defined contribution plans.
The numbers support the answer in the report released by Vanguard in February 2018 titled, Automatic Enrollment: The Power of the Default. This report states that the average participation rate in voluntary enrollment plans participating on its platform was 47%, while the average participation rate in plans with auto enrollment was 93%. Auto enrollment has accelerated participation in workplace plans, and may help improve contribution levels as more plans adopt automatic escalation of contribution rates.
The downside of automatic enrollment, as discussed earlier, has been a significant increase in the number of accounts left behind when plan participants change jobs. Although departing employees usually are asked how they would like to manage the savings in their workplace plan accounts, a significant number fail to make a decision. Solving one problem related to participant inertia unintentionally created another.
Early on, it wasn’t easy for companies and plan sponsors to find a safe harbor IRA provider. Most IRA providers didn’t have much interest in taking on large numbers of smaller accounts, which often are less profitable and just as labor intensive as larger accounts.
In addition, a number of boutique firms emerged and began offering automatic rollover solutions specifically designed to service small balance IRAs. The services provided by these firms included search processes designed to reunite missing and unresponsive participants with their retirement savings.
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The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.