By Spencer Williams
In the wake of the Fiduciary Rule, providers of all stripes are broadly reevaluating their strategies for the participant and asset retention that is essential to growing their retirement plan businesses. Over the past two decades, providers have primarily looked to capture IRA rollovers as a means to grow retirement assets. The Department of Labor’s new Fiduciary Rule creates challenges to that model. However, there is another, largely untapped, pool of assets within providers’ reach that can fuel growth—premature cash-outs. Auto portability, and portability solutions in general, represent a new and unique way to tap that potential source of growth.
Auto portability’s contributions to retirement plan business growth extend beyond the retention of assets and participants that are prematurely leaving retirement accounts. They also include benefits from small account incubation of participant savings, and an increase in average account balances for 401(k) accounts. Simply by plugging leakage, service providers and their plan sponsor clients stand to realize significant benefits as portability solutions take hold over the course of the next generation of current and future plan participants.
As illustrated by the Auto Portability Simulation (APS), which we developed in cooperation with Dr. Ricki Ingalls of Texas State University, when auto portability is broadly adopted over a 10-year period and remains in effect for a generation, more than $100 billion in new employer-plan savings will be generated for today’s and tomorrow’s small-balance plan participants. These retained savings will be the product of a nearly two-thirds reduction in the annual cash-outs of small-balance 401(k) savings accounts, i.e. accounts with less than $5,000, when participants change jobs. In assembling a picture of what’s happening today, we identified two types of cash outs—which we dubbed fast leakage and slow leakage—that, taken together, show that almost 90% of small accounts are eventually cashed out, a crippling pattern of behavior that is stunting plan growth.
The APS demonstrates that the number of participants who roll their less-than-$5,000 401(k) savings accounts into their new-employer plans will increase from today’s estimate of 200,000 per year to more than 3 million per year. That’s 3 million participants who would retain their savings and incubate their small accounts—a promising source of future asset growth based on automating portability.
The APS also identifies a new finding: that auto portability can meaningfully reduce the incidence of small accounts that plague the industry. The Employee Benefit Research Institute (EBRI) estimates that the routine and systematic consolidation of small accounts into new-employer plans will reduce the number of accounts by more than 20% as participants first retain their savings by consolidating them into their new-employer plan, and then, through ongoing contribution, grow those savings beyond today’s $5,000 threshold for mandatory distributions. When we plugged EBRI’s research into the APS, the results indicated that over the 30-year forward-looking period of the simulation, small accounts were reduced by literally tens of millions. And as research has amply demonstrated, the risk of a premature cash-out declines as a participant’s account balance grows. The dual benefit of retaining savings and participants that are currently leaving the system, while simultaneously reducing the incidence of small accounts and increasing average account balances, is a powerful engine for retirement plan growth.
A New Tool for Participant and Savings Retention
In his groundbreaking research report titled “Eliminating Friction and Leaks in America’s Defined Contribution System,” and his subsequent report on the behaviors of job-changers (titled “Manual Portability and the Mobile Workforce”), Boston Research Technologies CEO Warren Cormier identified the clear-cut linkage between the need for improved portability solutions and the systemic problems of leakage, small accounts, and lost/missing participants. By making it possible for participants to easily move their 401(k) savings accounts to their new-employer plans when they change jobs, sponsors can induce a substantial increase in participants’ readiness for retirement, and at the same time decrease leakage, reduce the chronic incidence of small, stranded accounts in their plans, and permanently shrink the number of lost/missing accounts in their plans.
All of the above benefits are delivered by making portability solutions available to participants that are leaving the plans. But how can we help participants that are enrolling for the first time? As it turns out, portability solutions work just as well for incoming participants—like two sides of the same coin. When a sponsor enrolls a new hire, and the new hire’s old account is rolled into the current plan, that new hire’s account balance will be well above the typical opening account balance (which is $0). Furthermore, the Department of Labor’s Fiduciary Rule suggests that sponsors have an unstated responsibility to keep participants invested in qualified defined contribution plans. Portability solutions—which facilitate the two-way movement of accounts into and out of plans—accomplish this goal of lifetime participation in plans without burdening plan sponsors with the responsibility to maintain an account for every employee for their entire working career.
Auto portability can improve the overall health of plans by facilitating participant and savings retention for accounts with less than $5,000, but that’s just the tip of the iceberg. According to EBRI estimates, similar reductions in leakage for larger account balances would yield well over $1 trillion in retained savings over the coming generation (and the only substantive difference between portability solutions for small accounts versus larger accounts is the requirement to gain consent for those participants with more than $5,000 in retirement savings). In the “frictionless” world made possible by portability solutions, there are no losers as participant balances grow, plans get healthier, and service providers grow their businesses.
Seamless and automatic plan-to-plan portability offers many benefits for plan sponsors and providers. Against the backdrop of an increasingly mobile workforce and an expanding need for services to remove friction from the roll-in process, plans and their service providers have nothing to lose and everything to gain by adopting proactive solutions like auto portability to make moving and consolidating job-changing participants’ retirement accounts the default choice for participants.