By Tom Hawkins
The Employee Benefits Research Institute (EBRI) has added yet another study to a growing body of research supporting the substantial retirement savings public policy benefits of auto portability.
On 2/7/19, EBRI released EBRI Issue Brief no. 473, authored by Research Director Jack VanDerhei, Ph.D., comparing the outcomes of participants in 401(k) defined contribution plans with auto enrollment (AE) against defined benefit (DB) plans.
While the primary objective of EBRI’s research was to address a growing public policy concern over the relative decline of DB plans, this study also evaluated the significant, positive impact that auto portability could have upon the retirement security of Americans who participate in 401(k) plans.
Comparing DB vs. DC Plans with Auto Enrollment
In the latest analysis, EBRI specifically examined the amount of retirement income that could be produced by AE 401(k) plans and then determined the final-average DB accrual rate required to generate an equivalent retirement income.
Under a baseline set of assumptions, which included historical rates of return and annuity purchase prices reflecting average 1986-2013 bond rates, AE 401(k) plans fared quite well against their DB counterparts. In the baseline, EBRI found that few scenarios yielded results where the equivalent DB accrual rate was under 1.5%. In other words, DB plans would typically have to accrue at more-generous rates to “break-even” with AE 401(k) plans.
However, when EBRI applied various “stress tests” by reducing rates of return, or by utilizing current annuity prices, AE 401(k) plans lost their comparative advantage to DB plans.
Auto Portability: The Great Equalizer
When EBRI’s equivalence comparisons incorporated auto portability, which reduces plan leakage from cashouts, AE 401(k) plans delivered substantially better results.
Pairing AE 401(k) plans with auto portability, DB plans had to provide far more generous accrual rates to achieve equivalence, vs. baseline.
The impact of auto portability was particularly impressive among the lowest income quartile, “given their lower account balances and the negative correlation between account balances and cashout activity.” Additionally, EBRI found auto portability’s results to be “dramatic for males in the lowest income quartile with only 11-20 years of plan eligibility” requiring a 3.1% DB accrual rate to reach equivalency, an increase of 82% over the baseline accrual rate of 1.7%.
The Growing Body of Research Supporting Auto Portability
This analysis adds to a growing body of research from EBRI demonstrating that auto portability, by reducing cashout leakage, broadly increases retirement security and delivers significant benefits for America’s defined contribution system.
Previous EBRI analysis addressing the public policy benefits of auto portability includes:
- Standalone benefits of auto portability (EBRI Issue Brief, no. 451- May 2018), estimated to be between $1.5 and $2.0 trillion.
- Benefits of auto portability, when combined with other retirement savings public policy initiatives, such as the Automatic Retirement Plan Act of 2017, or ARPA (EBRI Fast Facts – September 2018), where auto portability’s impact reduced the $4.13 trillion retirement savings shortfall by $645 billion, or 15.6%.
- Significant reductions in the retirement savings shortfall (RSS) for Generation X retirement savings shortfalls, by gender (EBRI Issue Brief, no. 471 – January 2019)