By Spencer Williams
When auto enrollment was widely adopted under the Pension Protection Act of 2006, it was a well-intentioned idea for helping Americans save more for retirement.
But in this case, what seemed like the perfect recipe for increasing retirement savings for hardworking Americans was missing a key ingredient.
Auto enrollment enabled sponsors to automatically sign up new employees to participate in their defined contribution plans. However, auto enrollment on its own doesn’t address the lack of seamless plan-to-plan asset portability in the U.S. retirement system. As a result, participation in defined contribution plans soared, but the high mobility of the modern American workforce led plan sponsors to experience a surge in small, stranded accounts.
Sponsors automatically enrolled new employees, but when the employees left, the time-consuming, complex, and expensive nature of retirement-savings portability from one plan to another caused many to choose the easiest option—simply leave their 401(k) accounts behind in their now-former employers’ plans. Others simply cashed out.
In August 2017, the Employee Benefit Research Institute (EBRI) announced that at year-end 2015, 41.3% of the plan participants in the EBRI/Investment Company Institute (ICI) 401(k) database had 401(k) account balances which were below $10,000. This was the database’s highest percentage of participants with under-$10,000 balances since year-end 2008.
Also, the EBRI/ICI 401(k) database and the Department of Labor’s Private Pension database revealed that active-participant accounts with below $15,000 increased from 23.5 million in 2005 to 31.6 million in 2015—a 34.5% jump representing an increase, on average, of 735,841 small accounts per year during that decade.
The problem with auto enrollment was that it was missing something to end the friction in the retirement system which causes so many participants to avoid consolidating their retirement savings into accounts in their current-employer plans when they change jobs. Without an efficient, cost-effective way to transfer 401(k) account balances from plan to plan, participants are more likely to strand their accounts, or choose a much worse alternative—prematurely cash out their 401(k) savings.
Auto portability—the routine, standardized, and automated movement of a retirement plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan—is designed to plug holes in the retirement system which undermine auto enrollment, enabling the latter to truly fulfill its purpose. EBRI estimates that the national adoption of auto portability would preserve up to $1.5 trillion, measured in today’s dollars, in the U.S. retirement system—the result of significant reductions in cash-outs, small accounts, and missing participants.
In other words, auto portability is like bacon—it’s the ingredient that makes auto enrollment, and the U.S. retirement system as a whole, better.
The Ingredients in Our Industry’s Bacon
Auto portability has been live for over a year. In July 2017, Retirement Clearinghouse completed, on behalf of a large plan sponsor in the health services industry, the very first fully automated, end-to-end transfer of retirement savings from a safe harbor IRA into a participant’s active 401(k) account. There are four components of auto portability, as implemented today:
- An electronic-record “location” search to identify multiple accounts that could belong to the same participant.
- A proprietary “match” algorithm to confirm that the accounts belong to the same individual.
- Receipt of the participant’s affirmative consent, electronically or via a representative, to begin an automated roll-in transaction.
- The implementation of the automated roll-in transaction once affirmative consent has been received.
A Boston Research Group case study on the results of the auto portability implementation shows that the impact of auto portability could be greater if it was made a default process, requiring an affirmative action to opt out of, rather than opt in, to the program. Fortunately, the Department of Labor (DOL) understands this, providing requested guidance on auto portability in the form of an Advisory Opinion and Prohibited Transaction Exemption that clarifies the plan sponsor’s fiduciary liability when adding auto portability as a default process—clearing the way for widespread adoption of auto portability. The issuance of the DOL’s guidance on auto portability is an important step in the ongoing bipartisan effort to enable the seamless plan-to-plan portability of retirement savings.
Auto portability can help millions of Americans save more for retirement, but the impact would be especially powerful for women and minorities. For example, industry research indicates that African-Americans, compared to the broader population, are 61.5% more likely to cash out their retirement savings—and African-American workers with less than $20,000 in household income are 134% more likely to do so.
Much work remains to be done, but any solution for helping plan sponsors and participants improve retirement outcomes should include auto portability. Like bacon, it makes everything better for all parties in America’s retirement system.