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All signs point to auto portability as the next big thing to shore up 401(k) participant behavior.
Most simply, auto portability entails an automated plan-to-plan retirement savings transfer (sometimes via a safe harbor plan) when workers change jobs. This concept is touted as a way to reduce plan leakage; according to the Employee Benefit Research Institute, approximately two-thirds of the impact of diminished retirement savings due to leakage is associated with the cash-outs that sometimes occur at job change.
The nonprofit Bipartisan Policy Center weighed in on the topic, as well, in a mid-2016 report. The group recommended that companies adopt processes that allow job-changing participants to seamlessly transfer funds from one defined contribution plan to another. It noted that these efforts could reduce cash-outs and early withdrawals by participants, “who are most vulnerable to making these destructive decisions at the point of job-change.”
The research shows support for auto-portability—but is the industry ready?
Spencer Williams, founder, president and CEO of Charlotte, North Carolina-based Retirement Clearinghouse, certainly hopes so.
Williams’ company has been at the forefront of the movement since it developed a basic transfer program in 2011 to help a large client seamlessly roll over new-hire retirement accounts. When the client noticed that the program reduced new-employee cash-outs by 50 percent, Williams had a revelation and began working on an auto-portability tool that could be more widely used.
Williams points to an earlier automation tool as one of the reasons for the increased number of retirement savings accounts—but it may also be the reason why so many have low balances.
“The Pension Protection Act of 2006 created a safe harbor for retirement plan sponsors to automatically enroll employees in their plans,” he says. “And while auto-enrollment helps plan sponsors and participants over the long term, it has unintentionally fueled a surge in small accounts, hurting both constituencies.”
Williams notes that auto-portability helps match individual electronic records in former and new employers’ retirement plans, ensuring that retirement savings are transferred automatically and seamlessly.
To validate his initial concept, Williams developed, with his team, a simulation of the overall effect of auto-portability on the industry. Their estimates show that, over 10 years, $1.3 trillion could stay in the retirement market—versus being cashed out, if auto-portability were successfully adopted.
“From there, we were also able to show the major record-keepers their respective shares of that savings, including a specific inflow/outflow, bottom-line impact to their businesses,” he adds. “They were impressed.”
So why isn’t auto-portability yet on the tip of everyone’s tongue?
“Because the Department of Labor’s (DOL) Fiduciary Rule sucked the air out of the room for three years,” says Williams.
He explains that budgets and resources are tied up in complying with the new rule, leaving very little room for other ideas.
“However, the enthusiasm is definitely there, and we are aiming for the first quarter of 2018 when dollars will loosen up and this can begin to get traction.”
He also hopes for further DOL guidance at that time, as well, since the agency initially pushed back on the universal use of negative consent in this instance; the DOL, in other words, is concerned that employees’ retirement balances would “auto port” to the new company plan unless they opted out.
To address the DOL’s concerns, Retirement Clearinghouse has implemented a “consent waterfall” that first seeks affirmative employee consent to move the retirement dollars into the new company’s plan. Williams estimates that at least 50 percent will agree. For those who don’t respond, the firm would continue to seek consent “unless the DOL comes through with an advisory opinion that would allow for negative consent to be used for the smallest balances,” he adds.
A key component of auto-portability should be appealing to advisors who aren’t as focused on small retirement balances: The tools carry no cost, Williams says, and, in the end, will increase the overall asset base under management.
“It’s a net gain for the advisor with minimal effort,” says Williams.
But encouraging all players to participate is another hurdle altogether. When an employee with any retirement sum heads to a new company, the auto-portability tool should send an electronic “ping” to see who currently holds the plan, then helping facilitate the transfer. Everyone, however, should be ready to send and receive these requests – something that is currently a work in progress.
This doesn’t seem to worry the key players, like Tom Johnson, Retirement Clearinghouse’s head of policy and development.
“The head of one of the largest record-keepers told me recently, ‘Look: It’s not a matter of if, but when auto-portability becomes an industrywide reality’.”