There’s a debate raging, partially fueled by the DOL conflict of interest rule, about whether participants in defined contribution (DC) plans should rollover their account balances into an IRA or keep them in their former employer’s plan. One think tank is claiming that DC participants would lose as much as $4.2 billion annually by keeping money in their former employers DC plan which flies in the face of the White House estimated that investors lose $17 billion a year through conflicted advice.
Vanguard reviews the consideration for employers thinking about allowing retiring employees to keep their money in the plan, especially with few retirement income options available, including:
- Philosophy of the company and the culture dealing with the former employees
- Costs of servicing these participants which may be offset by better pricing with more assets
- Flexible Distribution allowing participants the option to make ad hoc partial withdrawals
Not mentioned is whether companies want to deal with all separated employees some of who may be difficult as well as time spent answering questions.
For participants, investments in DC plans are often cheaper especially for larger plans where the costs may be as low as .50%. Costs can be much higher for smaller plans though the number of options in an IRA is much greater. Allowing people to keep money in a plan for those with outstanding loans may help mitigate fines and penalties.
Of the $7.4 trillion in IRAs, 86% come from rollovers much of which emanates from advisors. With more stringent requirements on advisors as a result of the DOL conflict of interest rule including determining if a rollover is in the best interest of the investor, experts are predicting that fewer participants, especially those with lower account balances, will have access to an advisor and will be less likely to rollover their assets.
So the first question is whether participants are better off leaving their money in their DC plan where a fiduciary is overseeing everything and costs might be cheaper, especially for participants in larger plans or whether getting access to a greater number of investments is worth the cost. But next, plan sponsors have determine whether it’s in the best interest of the company to allow participants that retire to keep their money in the plan for those retiring.
