RolloverSystems Simplifies Process for Providers & Sponsors

DC Plan News & Analysis - March 29, 2005

For years, defined contribution service providers have been contemplating—and salivating over—how to retain or capture the hundreds of billions of dollars in 401(k) rollover assets that will likely become available once the baby boomers leave the workforce and move into retirement.

And while those assets will be immense—an estimated $450 billion in 2010 alone, according to Cerulli Associates—companies currently may be overlooking another lucrative, though seemingly insignificant, source of rollover dollars—the assets of job changers. Though most 401(k) accounts of job changers are in themselves relatively small, as an aggregate, they represent a gigantic source of assets to money managers. What’s more, job-changers’ assets will become much easier to roll over into other tax-deferred accounts—both IRAs and workers’ new defined contribution plans—by the end of the month. On March 28, new Department of Labor guidelines under EGTRRA (the Economic Growth & Tax Relief Reconciliation Act) will require sponsors to roll over small balances—between $1,000 and $5,000—of workers leaving their jobs, rather than simply distribute them in cash.

"Money managers have belatedly realized that the IRA rollover market is the best way into the hearts and minds of investors," says Cerulli Associates.

Using RolloverSystems’ technology

One company that has always recognized the significance of the rollover market is RolloverSystems, a North Carolina-based provider of rollover solutions and technology for providers, advisors, sponsors, and participants.

"The IRA rollover market is probably one of the hottest markets in financial services today," says Reginald Bowser, president and CEO of RolloverSystems. His company is poised to help companies capture and retain some of the huge assets in the burgeoning rollover market, whether from job changers or retirees.

The key to RolloverSystems' business model is to take the often cumbersome and drawn-out process of converting rollovers and make it as quick and easy as possible—for sponsors, providers, and, in particular, participants.

Bowser says research has shown that the primary impediment to participants rolling over their retirement savings assets into IRAs or new defined contribution accounts is neither cost nor lack of guidance, but the burden of the process.

Simplifying the process

"We offer solutions that combine both technology and services that streamline the rollover process for every party involved," Bowser asserts. "For providers specifically, we allow them to capture the assets"— whether they’re already under the provider’s management or are part of some other financial institution’s book of business.

Instead of having to endure six to eight weeks of paperwork and delay, as often happens when participants roll over their accounts, especially from unbundled plans, RolloverSystems can do the work for all the parties involved and take only about 10 minutes of a participant’s time. Participants can access all the data they need online or through a telephone call.

The company has relationships with a number of leading financial institutions, including Fidelity, Schwab, JPMorgan Chase, and American Century. RolloverSystems can source rollover candidates directly to these firms. Bowser’s company also has relationships with sponsors and human resources entities. When workers switch jobs, these companies allow RolloverSystems to capture the assets and convert them to an IRA.

Helping the participant make the right choice

Its partners periodically notify RolloverSystems when a participant is leaving his or her job. Bowser’s company then sends brochures to the participants, notifying them of the advantages of rolling over their assets and the significant disadvantages of taking a lump cash distribution—both in taxes and penalty fees. The participants are invited to visit the Web sites of either RolloverSystems or their provider to learn more about the process. Once the departing participant expresses interest, a financial and demographic profile of the participant is drawn up. RolloverSystems will send them offers from up to five financial institutions interested in capturing their rollover business. (The technology is that of RolloverSystems, whether it’s on the company’s own Web site or that of one of their partners/providers.)

While technology is the key to the process, marketing is also integral, explains Bowser. "We don't get paid until we provide the customer with an obtained account or a new account," he says. "So we send the participant a variety of messages. We do anything we can to get that person to respond."

Winning the low-balance account

As with most aspects of the defined contribution business today, there is a large gap between the behavior of the haves and the have-nots when it comes to rolling over assets from one defined contribution account into another plan or an IRA.

Participants leaving their jobs are far more likely to take a lump-sum distribution than to roll over their assets when they have small account balances. Cerulli found that 72% of participants leaving their jobs take a lump-sum cash payment if their accounts are between $5,000 and $10,000 (see Figure 1). At the same time, only 6% take a direct cash distribution if they have $100,000 or more in their defined contribution accounts and are leaving their employer.

An earlier study by Cerulli found a corresponding propensity for participants with high balances to favor rollovers far more readily than their colleagues with small defined contribution accounts. Fewer than 20% of participants with less than $5,000 in their 401(k) accounts who are leaving their jobs roll over their balances (see Figure 2). But more than 80% go the rollover route when their accounts have more than $100,000 in assets.

Generally, the job changer—rather than the retiree—has the smaller balance. The reason for this is that, unlike a generation ago, when the typical worker stayed in a job 25 years, today’s workers change jobs an average of 11 times in their careers. This means a job change every three and a half years, which is not enough time to build up significant 401(k) assets. Yet 70% of all rollovers today result from job change, according to the Financial Research Corp.

And those job changers, even though their accounts might initially be relatively minuscule, represent a tremendous market for 401(k) providers. The reason for this is that, when those individuals leave the workforce, their account balances will be significant if they consistently roll their assets over when they switch employers.

"Previously financial institutions focused on large accounts," observes Bowser. "Now they realize it’s better to spend time to capture job changers now and position themselves for a relationship once the job changer is ready to retire."

Stopping the lump-sum distribution

Participants need help in making the decision on what to do with their 401(k) accounts when they leave their sponsors' employ.

"The reason they cash out is not because they want to, but because they don’t know what to do," Bowser says. That's why sponsors and providers should inform job changers of the great disadvantage of taking a lump-sum payment, especially when those individuals leaving their jobs are younger workers. "This is not a technology problem," says Bowser. "This is not an education problem. This is a marketing problem."

And individuals who already have gone through the lengthy, traditional rollover process are not likely to want to do it again, he adds. "The rollover process is so cumbersome that if they’ve done it once they never want to do it again." But RolloverSystems eliminates the cumbersome process, making rollovers much more desirable for participants looking for a vehicle for their account assets.

"It's like online banking rather than a laborious process," says Bowser. "We've eliminated that altogether."

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