By Thomas Hawkins | December 13, 2023
On the heels of the 11/7/23 announcement by the Portability Services Network that the industry-led consortium has launched its digital auto portability solution powered by Retirement Clearinghouse (RCH), RCH has made available the results from a new version of their Auto Portability Simulation (APS), a discrete event simulation that models the adoption of auto portability within America’s defined contribution system, over a 40-year period.
Last updated in 2019, the results of the new APS model are featured in a paper – Revisiting the Auto Portability Simulation: The Impact of the Portability Services Network, SECURE 2.0 and Expanded Access. As the name suggests, the new APS analysis has improved the model’s predictive accuracy by incorporating new parameters that reflect “changing realities” driven by three major developments: 1) the advent of the Portability Services Network, 2) the passage of the SECURE 2.0 Act and 3) ongoing progress in expanding access to workplace retirement savings plans.
The paper summarizes the results of the new simulation in four key findings, which highlight the growth of the participant population that will be subject to mandatory distributions, as well as auto portability’s effects on reducing cashout leakage, generating incremental retirement wealth, and delivering benefits to minorities and lower-income workers.
Changing Realities in America’s Defined Contribution System
First released in 2016, the initial Auto Portability Simulation was incrementally revised to incorporate new input data sources and other features, such as reporting by DC recordkeepers and asset managers.
Prior to the latest release, the most recent APS model – produced in 2019 – reflected a modest expanded access scenario, and featured a race & ethnicity overlay to assess the impact of auto portability on minority participants.
The changing realities cited in the new analysis include:
- The advent of the Portability Services Network (PSN), an industry-led consortium which has significantly increased the likelihood of widespread adoption of auto portability and provided “market insights” that were incorporated into the new model.
- The SECURE 2.0 Act, which not only codified auto portability, but increased the applicable mandatory distribution balance threshold from $5,000 to $7,000, effective 12/31/23.
- The ongoing expansion of access to workplace retirement savings plans, via multiple initiatives including provisions for long-term part-time (LTPT) workers, pooled employer plans (PEPs), state-level Auto IRA programs, expansion of automatic enrollment and a variety of other proposed initiatives. The model’s assumptions surrounding expanded access are documented in the paper’s appendices.
Key Findings from the Study
The paper documents four key findings, summarized below.
Key Finding #1: Significantly more small-balance job-changers will be subject to new mandatory distribution provisions.
The increased mandatory distribution threshold, combined with expanded access to workplace retirement savings plans creates a “perfect storm” to produce millions more small-balance job-changers who could benefit from auto portability. The model predicts that, over the next 40 years, 342.2 million job-changing participants will be subject to mandatory distribution provisions, regardless of whether auto portability is adopted or not. This represents an increase of 116.2 million participants (34%) over the prior APS model.
Key Finding #2: Auto portability exerts a dramatic effect on reducing cashout leakage.
This was not a surprising finding, given that reducing cashout leakage is auto portability’s raison d'être. What is more interesting is that – while small balance cashout leakage under auto portability is higher in absolute terms in the new model ($262.2 billion vs. $105.7 billion) – the reduction in cashout leakage attributed to auto portability (vs. no auto portability) is also much greater ($355 billion vs. $198 billion). Both increases are produced by the higher balance threshold and the much greater number of eligible participants.
Key Finding #3: The new APS model projects that auto portability will grow net incremental wealth by $1.6 Trillion, vs. no auto portability.
Over 40 years, under auto portability, 175.6 million job-changing participants will consolidate (“roll-in”) appreciated retirement savings of $1.75 trillion, vs. $155.2 billion without auto portability.
That places the net incremental wealth generated by auto portability at $1.6 trillion, a figure which is in the ballpark of a prior 2019 EBRI analysis, which calculated the present value of retained savings due to auto portability at $1.5 trillion for accounts less than $5,000, and $2.0 trillion in benefits for all balances.
Key Finding #4: Minorities will derive more benefit from auto portability as expanded access becomes the “great equalizer” in bringing minority DC participation in-line with demographic projections of America’s population.
The race and ethnicity overlay applied to the APS presumes that – gradually, over a 40-year period – expanded DC access will allow participation levels to mirror underlying population demographics. As participation increases for minority demographic segments, these segments will derive disproportionate benefits from auto portability.
In the 40-year modelling period, under auto portability 98 million minority job-changers with balances less than $7,000 will preserve an incremental $744 billion in retirement wealth, while 30 million Black Americans will preserve an incremental $216 billion in retirement wealth.
The value of any model is dependent upon the accuracy and usefulness of its predictions, and time will tell how the Auto Portability Simulation fares, vs. reality. One thing is certain – the APS model indicates that widespread adoption of auto portability could substantially improve the retirement security of millions of Americans – and recent developments seem to make a stronger case for that outcome.