By Spencer Williams
Much has been written in this column and elsewhere about the benefits that auto portability, and seamless plan-to-plan portability in general, can provide to millions of retirement-savers across America. As any entrepreneur can testify, it is challenging to initiate a major innovation, and then persevere through all the twists and turns along the road to widespread adoption. Fortunately for everyday Americans saving for retirement, there is already an established blueprint in place for launching a nationwide, private-sector retirement clearinghouse that will enable auto portability.
The blueprint comes from the successful execution of auto enrollment during the previous decade. Prominent behavioral economist Richard Thaler, who would go on to be awarded the 2017 Nobel Prize for Economic Science, conducted the initial research which demonstrated that a default 401(k) program which required plan participants to opt out would drive better retirement-saving results than one mandating participants to opt in—for the simple reason that opt-out plans override the behavioral tendency to procrastinate.
Mr. Thaler’s behavioral economic findings were then put into action when the Pension Protection Act of 2006 was signed into law. The Pension Protection Act allowed all plan sponsors to implement auto enrollment, and also permitted target-date funds to be used as a qualified default investment alternative (QDIA) in 401(k) plans. Then, following the government’s guidance and directives, plan sponsors and their consultants, advisors, and record-keepers began commercializing auto enrollment, and utilizing target-date funds as the QDIA in their plans.
The widespread adoption of auto enrollment moved the needle in helping more Americans save more for retirement, but it also caused an unintended consequence—a twist along the path to adoption that its advocates had not anticipated. Auto enrollment led to a surge in small, stranded accounts, principally because the retirement system was lacking a cooperative, cost-effective method for moving newly created, small retirement savings accounts between plans as the increasingly mobile workforce changed jobs.
Evidence of this unexpected trend emerged earlier this year when the Employee Benefit Research Institute (EBRI) published new research reporting that 41.3% of the participants in the EBRI/Investment Company Institute (ICI) 401(k) database had 401(k) account balances below $10,000, as of year-end 2015. This is the highest percentage of participants with less-than-$10,000 balances in the database since year-end 2008, when the industry was in the midst of the financial crisis. An additional finding from the EBRI/ICI 401(k) database and the Department of Labor’s Private Pension database indicated that 48.1% of all active 401(k) accounts have less than $15,000.
The small-account explosion has caused a variety of issues across the U.S. retirement system. Participants often wind up reducing their income in retirement by not moving and consolidating their 401(k) balances into their new-employer plans as they change jobs. High numbers of small accounts and lost/missing participants weigh down sponsors’ and record-keepers’ average account balances and other performance metrics, create unnecessary plan expenses, and also potentially open sponsors up to long-term fiduciary liability.
Ironically, a nationwide, private-sector clearinghouse for tracking down and matching lost/missing participants, and for helping sponsors and participants complete roll-ins of prior-employer-plan accounts into active accounts in current-employer plans, can be initiated using the identical blueprint for the implementation of auto enrollment—which unintentionally created the small-account problem.
Sticking to the Blueprint
Boston Research Technologies CEO Warren Cormier, like Richard Thaler before him, has conducted research over the past five years showing that most participants who left small accounts behind in prior-employer plans would gladly agree to transport those savings through auto portability—but they need incentives relying on behavioral finance principles in order to overcome their self-destructive behaviors.
As Mr. Cormier describes in his recently published white paper, “Making the Right Choice the Easiest Choice: Eliminating Friction and Leaks in America’s Defined Contribution System,” after auto portability was launched earlier this year for a large plan sponsor in the health services sector, more than 15% of “orphaned” participant accounts who were “reunited” with their current-employer plan responded to a notice offering to help them complete a roll-in. That 15% response rate is significantly higher than the observed rate of response for direct-mail solicitations, and of the participants who responded, 91% of them gave their consent to the roll-in and directed that the consolidation of their multiple accounts into their current-employer plan move forward, paying a small fee to do so.
Of those that rolled accounts forward, 55% had balances that were less than $1,000. Given an easy option of consolidation, the vast majority of respondents preferred to retain these balances and roll them forward, even when paying for the service. These results dispel the myth that small-balance accounts are “expendable,” and call into question the common practice of automatically cashing out terminated participant balances that are below $1,000.
Mr. Cormier’s research demonstrates that auto portability moves the needle for the consolidation of small accounts because it removes the frictions associated with the roll-in process, and helps participants overcome behavioral tendencies which encourage the hesitation and indecision that often drive poor retirement outcomes. In keeping with the blueprint for implementing auto enrollment, the government should now issue guidance on auto portability to trigger commercial adoption. To date, calls for such guidance have come from the White House, a bicameral group of Congress members, the Bipartisan Policy Center, and 11 retirement industry-related trade organizations, all expressing support for auto portability and a nationwide, private-sector clearinghouse for retirement savings accounts.
As has occurred before, following this blueprint will trigger the catalyst needed to cause the retirement services industry to come together and collaborate in the commercial implementation of auto portability, even as we continue to work with the industry and government regulators to facilitate the establishment of an auto-portability-powered, private-sector clearinghouse.
The blueprint for making this dream a reality—and helping more participants preserve more retirement savings—has already been mapped out. We just need to complete the final steps in building the foundation.
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