The damaging impact of DC plan failures

The whitepaper found that during a change of employment, 45 percent of DC participants will cash out their balances even though they face costly penalties. These "drop outs" remove trillions of dollars from America's retirement savings over time. Statistics show that employees who cash out are usually ones with lower balances and therefore, the ones that need the money the most.

The failure of the DC system is glaring when it comes to job-changers. Since the advent of the Pension Protection Act of 2006, employees have increasingly been enrolled DC plans automatically. However, that hand-holding stops when the employee switches jobs and renders them with no knowledge of the mechanics behind their DC plan because it was all done for them.

"The defined contribution system is very efficient at bringing assets into plan accounts, but is very weak at moving money between accounts," said Warren Cormier, president of the BRG. "There is a tremendous amount of friction that results from complex rollover procedures and an absence of assistance at the point of job change. The result is too often leakage—participants taking the paths of least resistance by cashing out or leaving their accounts behind with their old employers. The goal is obviously to stop cashouts and keep the dollars either in their next employer's DC plan, preferably, or in a qualified account such as a low-cost IRA."

BRG found during the case study that there was a lot of success when the employer utilized Retirement Clearinghouses to assist participants with rollovers and new employer plans. When employees are given access to start-to-finish assistance from impartial counselors:

• Cashouts were cut in half;
• There was a reduced number of stranded accounts; and
• An estimated $6 million in costs were saved.

Plan sponsors were also able to reduce administrative issues, fiduciary tasks and lower plan costs.

Some of the best practices noted in the whitepaper that the company implemented include:

• Assisted roll-in;
• Automatic rollover;
• Assisted rollover; and
• Annuity, which assists current employees near retirement annuitize some or all of their plan balances.

The simple steps taken by the company in the case study do not place a heavy burden on the plan sponsor or on the individual employee. They make a large impact in addressing the breakdowns in the DC system that foment damaging consequences for all parties involved.