Rolloversand rollover optionsare likely to soar in
the next few years, thanks to burgeoning Boomer balances and
new automatic rollover rules
optionsare likely to soar in the next few years, thanks to
burgeoning Boomer balances and new automatic rollover
» Three Tips for Buyers
The amount of money your 401(k) participants roll over
when they leave is poised to double in the next several
years. So, get ready. Rollovers will double to $400 billion
annually by 2010, predicts Chris Brown, Boston-based
director of retirement market research at Financial
Research Corp. "It is really a combination of declining job
tenure and the Baby Boomers hitting retirement," he
explains. Spiffed-up technology as well as the new
automatic-rollover rules mandated by the Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA) that
kick in this year will boost the total, too.
How to prepare? Recently, plan sponsors have had to pick
a landing place for the money automatically rolled over as
a result of the new law. Now, many may start to explore
technology that allows for simplified, paperless rollovers
and, a few years down the road, sponsors may be giving
participants access to a marketplace of IRA vendors rather
than leaving them to fend for themselves.
Fears of fiduciary liability generally have kept plan
sponsors from guiding participants toward a rollover
supplier, despite the confusion many workers feel in having
to navigate the IRA industry on their own. "It is a touchy
issue with plan sponsors, in that they do not want to
select a provider," says Luis Fleites, a senior analyst at
Cerulli Associates in Boston. "Plan sponsors want to
explain the rollover options, but they do not want a
Providers that handle a company's 401(k) plan often mail
an IRA rollover kit to departing employees, and frequently
succeed in picking up the business. The sponsor often does
not know about the sales pitch, or looks the other way.
The new automatic-rollover rules mean that sponsors must
pick a destination for the money involved. As of March 28,
plans had to start automatically rolling over distributions
of $5,000 or less if a participant does not make a
distribution election. "Sponsors have to either change the
plan document to keep the money in the plan or figure out
where to put the rollovers," says Jude Metcalfe, CEO of
Wealth Management Systems Inc. in Holgate, New Jersey.
For now, many seem inclined to go with their
recordkeeper's rollover product, a decision blessed in a
notice issued by the US Department of Labor late last year.
"The government has said that, for default IRAs, you really
do not have to have a competitive bid process," says
Michael Weddell, a Detroit-based retirement consultant at
Watson Wyatt Worldwide. "With the DoL safe harbor, there is
not much risk in picking the rollover product from your
Not all suppliers will want that business, though, Brown
believes. "Most firms would rather wash their hands of it,"
he says. "They do not want those small accounts." Of
course, some low-cost brokerages want the small balances,
he adds, and larger providers may outsource them.
Maybe not. Mutual fund companies that have spent a lot
of time building up a relationship with a sponsor may not
want to see those assets flying out the door. Or they may
take the business in hopes of getting a worker's future
rollovers or retail-brokerage dollars.
Change is afoot, too, for participants who do choose to
roll over money. New suppliers are popping up to promote
paperless rollovers that link their technology directly
with recordkeepers to simplify and speed up the process. "A
major impediment that causes participants to cash out is
the fact that the process is so cumbersome and
inefficient," says Reggie Bowser, president and CEO of
RolloverSystems, Inc., in Charlotte, North Carolina. "What
we are trying to do is reinvent the rollover."
"The rollover issue is being driven by the financial
services firms and recordkeepers. Today, it is pretty much
what the provider wants," Metcalfe says. "Some day, plan
sponsors are going to say, 'I want my participants to have
A sponsor would not be choosing a provider for participants
in this case, just giving them access to information about
providers, so they can choose.
However, the concept will take a while for providers to
accept, Fleites says, given that it intensifies
competition. "That is still in its infancy," he adds.
The idea is bound to get some resistance from suppliers,
Metcalfe acknowledges. "I remember when there only used to
be proprietary mutual funds," he says. "Then, providers
realized that they could not survive that way. It is going
to be the same with IRAs."
Moreover, the IRA marketplace is likely to get deeper as
well as broader. IRA offerings will become more robust in
the next five years, Brown thinks, to include things like
retirement-income planning, estate planning, insurance, and
long-term care insurance. "Distributors realize that, with
such a large population hitting the distribution phase,
there is so much more they need to offer them. It is not
just a matter of sitting down for one meeting," he says.
"The firms that offer a full suite of services are going to
have an advantage, at least with higher-balance
Three Tips for Buyers
First, sponsors looking at rollover providers should
examine their own participant base. If most have lower
account balances, Brown says, focus on low-cost providers
and lifecycle funds. If balances are high, look for things
like a brokerage platform and broader financial planning
Second, scrutinize fees. Delve more deeply into any
advisor consultations offered: Does the investor pay for
that à la carte, or is it part of a package? À la carte
services can get pricey. "A lot of firms might say that
they offer a lot of services," Brown says, "but the fees
can start to add up pretty fast."
Third, focus on whether a supplier's technology helps to
automate and simplify the process. "The easier it is,"
Fleites says, "the more likely that participants are going
to roll over the money and keep the assets on a