Auto Portability - Frequently-Asked Questions (FAQs)
Your source for the most frequently-asked questions about auto portability. Click on the links below to access the FAQs,
Auto portability is the routine, standardized and automated movement of an inactive participant’s retirement account from a former employer’s retirement plan to their active account in a new employer’s plan. Auto portability is a voluntary benefit, i.e. participation is not mandated.
Like participation and investment selection, portability is a plan feature whose use is sub-optimized due to participant inertia and/or frictions with the plan-to-plan transfer process. These frictions produce negative consequences for participants’ retirement security. Auto portability is the first industry-wide solution to address this problem.
Auto portability can be readily implemented by introducing critical infrastructure that links employer-sponsored plans, maintains and promotes technology standards and interfaces, and directs the flow of data between record-keepers – a clearinghouse / common infrastrucutre that serves the portability and consolidation needs of America’s mobile workforce.
Auto portability utilizes technology to reduce the time, paperwork and expense associated with moving a participant’s account into their new-employer plan after they change jobs.
Auto portability was conceived to serve the needs of participants that are subject to the Mandatory Distribution / Force Out provision of their employer-sponsored plan, i.e. accounts with less than the current limit of $5,000, and is designed to work within the existing infrastructure and data flows of the qualified employer plan system. Presupposing a future change from the current $5,000 limit to perhaps $15,000, auto portability can be readily adapted to larger account balances.
Auto portability fits neatly into the framework of the many “auto” innovations – such as Auto Enrollment and Auto Investment Allocation (target date funds) – that have proven successful in enhancing the retirement-saving prospects of millions of Americans. Today’s steady increase in the adoption of Auto Enrollment has triggered the creation of increasing numbers of small accounts in plans and further highlights the need for auto portability.
Auto portability reduces leakage by retaining participants’ savings and moving them forward to their new-employer plan at the time of their job change.
Using a sophisticated discrete simulation model, in collaboration with EBRI, Boston Research Technologies and Dr. Ricki Ingalls of Texas State University, Retirement Clearinghouse calculated the cumulative dollar value of roll-ins to new-employer plans for account balances of $5,000, and $15,000 and compared those results to the current state of the industry.
The cumulative new private sector savings gain illustrated below is driven by the large number of annual job-changers with small accounts; 47% of all participants have less than $15,000 in retirement savings at the time of their job-change (the gold line shown below).
The Auto Portability Simulation (APS) demonstrates that the aggregate effect of auto portability is a powerful new source of retirement savings growth over the 30-year period that is modeled. With the Mandatory Distribution limit at $15,000, auto portability will add more than $1.3 trillion to America’s retirement savings pool.
A related finding of the APS indicates that routine and systematic consolidation of participants’ accounts when they change jobs would reduce the number of small accounts in the retirement system by more than 20%, making the retirement system more administratively efficient and driving down expenses.
The aggregate effect of auto portability is a powerful new source of private sector retirement savings growth over the 30-year period for the current and coming generation of retirement plan participants. Examining the discrete segment of the population that has less than $15,000 in savings at the time of their job change, the benefits of auto portability will reach more than 125 million workers.
These benefits largely accrue to younger, minority and low income Americans, those disproportionately impacted by cash out leakage. Almost by definition, small account balances are a function of income: the lower a worker’s income, the more ordinary household expenses eat up their paycheck, leaving only small amounts available for retirement savings. This same logic extends to younger workers as it is well documented that incomes rise with age.
By routinely preserving and consolidating these account balances into an employer-sponsored plan, younger and lower wage participants receive the protections provided by ERISA fiduciaries and the benefit of long-term investment options that are most often institutionally priced.
The chart below illustrates the long-term consequences of a 30-year-old worker prematurely cashing out $5,000 from her retirement plan at the time of a job change.
America’s workforce is more mobile than ever before, but its members’ need to keep their savings intact, and move them forward as they change jobs, is not being met. The Employee Benefit Research Institute (EBRI) estimates that the average American will have 7.4 jobs over their working career, producing an estimated 14.8 million workers with retirement accounts changing jobs each year.
Almost 50% of each year’s job changers have less than $15,000 in their account at the time of their job change and median account balance for all participants with less than $15,000 (47% of all job-changers) at the time of their job-change is $4,642.
These participants are making decisions that create adverse consequences for their retirement savings. These include:
1) Taking No Action:
Participants with less than $5,000 that don’t respond to a notice are forced out of their retirement plan and into a Safe Harbor IRA, where by statute they are invested in money market funds that yield little or no interest. Low money market returns combine with annual administrative fees to deplete these accounts over time.
Participants with account balances between $5,000 and $15,000 are permitted to keep their inactive accounts in their former employer’s plan, yet industry reports indicate that these accounts remain at high risk of premature cash out. In addition, terminated accounts are often incur additional record-keeping fees.
- Participants with account balances of less than $5,000 are prematurely cashing out their savings at rates approaching 60% at the time of their job-change (“fast leakage”). That’s not the whole story because accounts that are rolled over to Safe Harbor IRAs remain at risk. Of those whose savings are retained in a Safe Harbor IRA, research shows that an additional 24% of the remaining original accounts cash out by the seventh anniversary of their job-change (“slow leakage”).
Taken together, Fast and Slow Leakage indicate that an estimated 84% of these job changers ultimately cash out their accounts, incurring taxes and penalties and badly damaging their prospects for a secure retirement
- Participants with account balances between $5,000 and $15,000 are also prematurely cashing out their savings at rates approaching 40% at the time of their job-change. At present there is no reliable measure of annual rates of “slow leakage” for these accounts, yet EBRI’s Retirement Security Projection Model, ‘Auto Portability Scenario’ confirms that it too contributes to overall leakage in the retirement system.
- Combined leakage for all accounts less than $15,000 is estimated to be 47%.
Over time, participants change residences but neglect to update their address of record or lose track of their old accounts, creating the potential that these savings will ultimately be depleted by fees or lost to them via escheatment to their state of residence. Research indicates that 3% to 5% of all retirement accounts are classified as lost/missing.
Auto portability remedies several systemic issues that currently plague tens of millions of middle-class Americans’ efforts to save for retirement:
1) Reduce Leakage & Increase Savings:
According to a 2009 U.S. Government Accountability Office report, 89% of all leakage occurs at the time a participant changes jobs. Auto portability creates a new option that inhibits leakage by systematically consolidating savings in a new employer’s plan, thereby incubating savings when accounts are small and most at risk of being cashing out, and methodically increasing overall retirement savings. Leakage is particularly acute among younger, minority, and lower-income participants.
Auto portability has the potential to help 20,000 small-balance participants per day retain their retirement savings, which will accumulate to more than $1.3 trillion over the next generation of savers.
2) Reduce Duplicate Accounts & Reduce Cost:
Auto portability utilizes technology to systematically consolidate savings in a new employer’s plan, reducing unnecessary costs incurred from maintaining multiple accounts.
3) Reduce Lost & Missing Retirement Accounts:
Consolidating participants’ retirement savings in their current-employer plans leads to fewer accounts classified as “lost/missing” simply because fewer accounts are stranded across the qualified plan universe.
4) More Appropriate Long-Term Investment Allocation:
Savings rolled into a participant’s active plan will be invested according to the participant’s standing investment elections or in the plan’s default investment option, an appropriate investment alternative that has the potential to produce compounded earnings of 5% to 7% per year over a long investment horizon, a significant multiple versus the 0.10% to 0.5% annual interest earned in the money markets funds utilized in Safe Harbor IRAs.
5) Reducing Friction & Increasing Portability:
Each of the above issues traces their roots to a common cause: systemic frictions that frustrate saver’s best intentions to retain and grow their retirement nest egg. These frictions are most evident at the time of a job change and can be remedied by adopting standards and using technology that links plans.
The benefits of auto portability accrue to all employers in the form of lower plan administration expense and burdens for plan sponsors, a benefit achieved through both a reduction in the number of small, inactive accounts and the increase in active account balances as auto portability transfers new employees’ savings into their current employer plan. Expense reductions are also realized as the incidence of lost and missing accounts is reduced, as well as the incidence of uncashed checks.
Administrative cost and burdens are a particularly acute issue for companies that exhibit high rates of employee turnover, such as those in the retail, hospital services, transportation, hospitality, and food & beverage industries, which collectively employ tens of millions of workers.
A secondary benefit to employers is the increase in financial wellness experienced by their employees as they preserve their savings and accumulate larger account balances over time.
The benefits to financial institutions and service providers accrue slowly over time and include increases in the assets that they invest and service as well as a significant reduction in the number of small accounts over time. Like employers, service providers also benefit from a reduction in small accounts. Auto portability has been introduced to a majority of the larger plan service providers and has seen measured progress along the path to adoption and implementation. Eight of the top ten record-keepers - a group that includes Fidelity Investments, Empower Retirement, Alight, TIAA, Principal Financial, Vanguard, Bank of America Merrill Lynch and Wells Fargo - are engaged in auto portability discussions at a variety of stages.
Yes. In general, the benefits of ‘frictionless portability’ can be applied to accounts of all sizes. EBRI, the retirement industry’s premier research institute has recently published its ‘Auto Portability Scenario’ that quantifies these broader benefits, indicating that perfect auto portability for accounts of all sizes would retain an additional $2T in retirement assets, as measured in today’s dollars.
The “heart and soul” of RCH Auto Portability, the auto portability solution introduced by Retirement Clearinghouse, is an electronic records matching technology that is used to Locate & Match℠ participant accounts across record-keeping platforms.
The Locate & Match technology is flexible and secure, and can be employed across a wide range of account types and platforms to locate and match participant accounts. For example, the technology can be utilized to confirm that an account in a Safe Harbor IRA belongs to the same participant with an active account in their current employer’s plan. Similarly, the technology can be utilized to confirm that an inactive account in an employer’s plan belongs to the same participant with an active account in a different employer’s plan.
In addition to the Locate & Match service, RCH Auto Portability encompasses record-keeping and customary account services. Record-keepers can continue to maintain small accounts on their platforms (defined contribution plan or Safe Harbor IRA) while utilizing the Locate & Match service to help participants keep their retirement savings intact. Alternatively, record-keepers may choose to outsource account administrative services to a third-party service that provides the Locate & Match service on their behalf.
RCH Auto Portability also includes an automated account roll-in service that facilitates a roll-in to a new employer’s plan, which occurs after a successful Locate & Match. An automated roll-in reduces the friction, time and expense typically spent moving a participant’s savings into their new employer’s plan.
RCH Auto Portability incorporates four basic operating elements:
1) Notices: Upon becoming subject to a Mandatory Distribution, legally-required information notices are provided to participants in the auto portability program.
2) Electronic Records Matching:
- Account information is extracted, formatted and passed to the clearinghouse (RCH).
- The clearinghouse collects, standardizes and re-distributes account information to all record-keepers that participate in the auto portability program.
- Participating record-keepers utilize the Locate technology to query their plan/participant records to identify potential matches of accounts.
- Upon attaining a successful Match, account information is further validated and a notice is sent requesting that the participant consent to the transaction.
- Participant consent to the roll-in transaction can be obtained utilizing a variety of methods including:
- Affirmative written consent obtained at the time of enrollment in their new-employer plan.
- Affirmative consent given by accessing a secure website or voice response system.
- Affirmative consent given by contacting a call center.
- Non-responder roll-in transactions.
- The inactive account is closed and the balance is rolled into the participant’s new-employer plan.
- The balance is automatically invested according to the participant’s current investment elections, or if the participant has not made an election, into the retirement plan’s default investment option.
- The participant is notified when the account is moved and consolidated into the new-employer plan.
No. RCH Auto Portability incorporates a flexible architecture that enables electronic record matching between any type of account repository / system that is used to record-keep plans or IRAs. What this means in practice is that once the technology interfaces are constructed, account records can be matched between any safe harbor IRA account held by any financial institution and any active plan record-kept by any financial institution.
RCH Auto Portability is a “user-pay,” fee-for-service program. Participants pay for services only as they are used.
RCH Auto Portability employs a progressive pricing structure; account balances below $50 will be moved to their new-employer plan at no charge, while accounts with between $50 and $590 will be charged proportionately lower fees as the account balance declines. Record-keepers that participate in the RCH Auto Portability program receive a portion of the per transaction fees to compensate for their cost of processing roll-in transactions.
Due to the high ratio of accounts with less than $590 to the total of all Mandatory Distributions, the average fee for a participant rolling savings into their new-employer plan is estimated to be $40 to $45 during the period when transaction volume is less than 1 million per year.
RCH Auto Portability also incorporates a 20% reduction in the fee charged to a participant when the annual volume of roll-in transactions exceeds 1 million transactions per year, i.e. the benefits of scale/critical mass are passed on to participants in the form of reduced fees. At these volumes, average fees are further reduced to $30 to $35 per transaction.