Much has been written about the proliferation of small accounts in our nation’s retirement system, and the problems that this explosion has created. A primary solution to the small-account quandary that I have frequently advocated in this column is auto portability.
However, while auto portability can create conditions which make it easier to transfer 401(k) savings from an account in a participant’s former-employer plan to an account in the participant’s current-employer plan, the process isn’t magic. Small accounts can’t move themselves. Auto portability is a good remedy, but it also requires a nationwide infrastructure for its full potential to be realized. A retirement industry clearinghouse would unleash auto portability’s full potential, and hopefully spawn other portability and consolidation solutions that would improve the “connectedness” of our country’s defined contribution plan system.
Small Accounts Continue to Plague Plans
The need for a complementary infrastructure is what binds auto portability and auto enrollment. While auto enrollment has clearly fulfilled its goal to bring a greater number of young and lower-income workers into the 401(k) plan system, the result doesn’t fully match what auto enrollment’s proponents had hoped. Without seamless plan-to-plan portability, and/or counseling on the benefits of conducting a roll-in at the time of a job change, most participants who are automatically enrolled in 401(k) plans will leave their accounts behind when they switch employers. Or worse, if they have less than $5,000 in their account, they will likely cash out or be automatically rolled into a safe harbor IRA.
The data speaks for itself. In August, 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 under $10,000. This is the database’s highest percentage of participants with balances below $10,000 since year-end 2008.
Furthermore, findings from the EBRI/ICI 401(k) database and the Department of Labor’s Private Pension database indicate that active-participant accounts with less than $15,000 grew from 23.5 million in 2005 to 31.6 million in 2015. This 34.5% rise represents, on average, an increase of 735,841 small accounts per year!
But that’s not all. During the same 2005-2015 period, the growth of small accounts with less than $15,000 outpaced the expansion of access to defined contribution plans, which experienced a 25.5% increase. According to these findings, accounts with below $15,000 now represent 48.1% of active 401(k) accounts as a whole.
The above data confirms that small accounts have continued to proliferate in spite of bipartisan government support (which includes initiatives by the White House and the Bipartisan Policy Center) for measures to reduce the retirement system friction standing in the way of seamless plan-to-plan portability.
In addition, the workforce is becoming increasingly mobile. The Bureau of Labor Statistics’ quit-rate data shows that the monthly quit rate—the measure of turnover in the workforce—has increased from 1.3% per month in July 2009 to 2.2% per month in July 2017. This means that while auto enrollment has increased participation in 401(k) plans, the workforce is also growing more mobile, meaning much of the increase in small accounts represents stranded accounts from mobile workers.
Plan sponsors are already allowed to automatically roll stranded accounts with $5,000 or less out of their plans and into safe harbor IRAs. They can also automatically cash out stranded accounts with $1,000 or less. However, while these measures can help sponsors, they don’t benefit participants—and can open sponsors up to significant fiduciary liability.
Lost & Missing Participants Need a Clearinghouse Too
Government proposals for a national retirement account registry to assist sponsors with locating lost and missing participants are well-intentioned, but here too, the suggested policy doesn’t go far enough toward solving the underlying problem. Such a registry is a reasonable idea on the surface, but where would its participant data come from? It would come from the sponsors and record-keepers that hold out-of-date contact details for missing accountholders. If the registry only stores out-of-date contact details for missing participants, the information offered may be frequently updated, but remain stale.
Again, the idea for a national retirement account registry is a good one, but it needs to expand its mission if it’s really going to make a difference. Instead of a registry that only stores account data for lost and missing participants, the problem needs a complementary process—moving newly “found” participant accounts into each participant’s current-employer plan, or if one doesn’t exist, an IRA. With this additional assistance, the probability that those savings are preserved for consumption during retirement measurably increases. The problem is best solved at its root cause by a system-wide, private-sector clearinghouse that acts as a utility, or go-between, for the record-keepers that administer our employer-based system, keeping the solution directly connected to its source—our mobile workforce.
The clearinghouse would function by storing account data from sponsors across the country to help locate missing participants, but it would also “go the extra mile” by enabling the participants to consolidate their small accounts into their current-employer plans once they are located. This would keep the process of moving small accounts out of plans (without incurring fiduciary liability) going, even as small accounts continue to pop up due to auto enrollment and high job turnover.
The technology enabling auto portability—the routine, standardized, and automated movement of a plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan—went live over the summer. But as outlined at the beginning of this article, even though the tools are available, accounts can’t move themselves. In addition, with over 20% of all plan participants expected to change jobs annually, small accounts will continue to weigh down plans unless and until the complementary infrastructure delivered by a clearinghouse enables auto portability to come to life.
By facilitating seamless portability between employer-sponsored plans throughout the U.S., including auto portability for 401(k) accounts with up to $5,000, a private-sector retirement clearinghouse would make full use of the tools underpinning auto portability to meaningfully combat the small-account problem.