Feature | Published in April 2005

Retirement Programs: Rollovers: Reinventing the Rollover

Rollovers—and rollover options—are likely to soar in the next few years, thanks to burgeoning Boomer balances and new automatic rollover rules

By Judy Ward | April 2005

Rollovers—and rollover options—are likely to soar in the next few years, thanks to burgeoning Boomer balances and new automatic rollover rules

» 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 sales-ey approach."

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 recordkeeper."

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 choice.'"   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 rollovers."


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 services.

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 tax-deferred basis."