Automatic Rollovers and Fidelity

[Effen]

A client just informed me that their Fidelity rep. recommended against the automatic rollover, implying that Congress may change the rule? They recommend that the client reduce the maximum to $1,000 and not pay automatic rollover.

This seems to be counter to what I'm seeing with the other larger financial institutions. Most seem to be embracing the rollover concept and making it very easy for the plans.

Has anyone else encountered this from Fidelity? Any idea why they would say this?

[JanetM]

Effen, my first guess is that they realize they won't make any money on the little accounts.

[E as in ERISA]

I think that most are providing the product to clients just because they have to -- as opposed to "embracing" it. The intent of the rule is good. To keep people from having retirement money cashed out. But from a practical standpoint I don't think that the automatic rollover solution is the answer. For all those who actually just wanted the cash, there is now more work to be done on their part and the administrators to get that cash to them. For those who will get automatically rolled over -- because they care so little that they will just let their employer move their money to an IRA provider that they know nothing about, it seems that there is a reasonably significant likelihood that they will get separated from the money over the long run. They will move a couple of times. Their address won't get updated when they move from their parents' house to the friends' house, etc. A lot of the accounts will get escheated. In five or ten years, John Doe in Anytown USA might remember that he worked at ABC Co in Anytown this year and that he had some retirement money there. He is less likely to remember that his plan was at Fidelity or another large national provider in a different state than his employer -- even less likely to remember that the money got moved to an IRA of Fidelity or that other provider. The HR people at ABC have no responsibility to help him find that money beyond the notices that he gets this year. He might be more likely to get some of the money if it stays in the plan -- even if he gets charged an annual fee for the account as a terminated participant.

[Effen]

Political debate aside, I think the rollover option is a lot easier for the employer. They just transfer the $ and let the financial institution worry about tracking and paying the participant. That is a lot better than keeping track of $1,100 for the next 40 years.

I agree, it may not be better for the participant.

I was just a little surprised by Fidelity's position and wondered if others encountered the same thing.

[Guest hodag]

We received the same opinion from Fidelity. If we were to roll the account over to a Fidelity (or some other financial institution's) IRA, I wonder if the employee could ever come back to us to allege that they lost money in the plan we had set up for them? For the time being, we've elected to allow the $1000-5000 balance accounts to remain in our plan.

[Guest Willie]

Our record keeper suggested the same thing; change the cash out to $1,000 or less. We decided against that option since it could mean higher r/k fees for our clients. Not sure how Fidelity bills, but our r/k charges according to # of participants on the system. For those plans whose fees are based on average participant account balance, the greater the number of participants the lower average balance and therefore higher per participant charges.

[mbozek]

Under Dol regs the plan can charge the accounts of terminated participants for plan admin costs to offset the cost of keeping particpants in the plan. The installation of rollover accounts is not free -there is set up charge of 250-1000 to establish the program and a charge for each particpant's account that is transferred to a rollover account. In most states the account will escheat to the state in 3-5 years if there is no activity by the participant which is a big reason why major providers like fidelity do not want rollover accounts. If the participant in a qual plan cannot be located the account can be forfeited and used for plan purposes subject to restoration if the missing participant makes a claim for benefits.

[Guest PatF]

We decided to not force distributions between 1000 and 5000. What we are thinking about doing is giving the names to a "new" broker that is willing to work and try to get some of the rollovers and establish a relationship with the people in the hopes that they might get future referal business from it. The "newer" brokers have the time and need the money. We work with whoever holds the initial investments and talk to the trustee first - but in some cases the broker on the account does not want to bother with small rollovers, but has a "newer" broker in the same office that will. With this contact, the participants are educated, paperwork gets filled out, whether or not they do the rollover and the broker does the work. Then the participant has their money and we are done with them.

Just another idea.

Why don't participants take their money and leave small amounts in the plan - it's easier for them to do it. They don't get around to it or it seems difficult. If we make it easier for them and remind them, they will usually fill out the paperwork.

Pat

[BFree]

hodag - look at the allowable investments for auto-rollovers. You can't lose money except perhaps on setup of the account.

[Guest hodag]

I haven't (yet) seen any regulations on allowable investments; if the funds go directly into a conservative investment like a money market, there is probably little future risk to the employer creating the rollover. Of course, in this litigous world, what if the account owner misses a stock market rally while sitting firmly in a money fund -can/will they allege that their money was handled improperly?

We're allowing the $1000-5000 accounts to remain in our plan to avoid this, because they've already selected the investments. Also, in our case, our 401(k) plan fees are not based directly on the number of participants, so we're able to spread the costs over active and inactive accounts.