By Tom Hawkins
A recent survey of defined contribution (DC) plan sponsors found that interest in retaining assets for retirement is on the rise. That finding, paired with certain provisions of the SECURE Act of 2019, suggests that DC plans are on a path to becoming “decumulation vehicles” for American retirees. While these developments are encouraging, persistently high levels of cashout leakage, increasing missing participants and other factors produce understandable pessimism regarding the future of DC plans.
In my view, DC plans have lacked one vital feature: plan-to-plan portability, the missing ingredient required to accommodate America’s highly mobile workforce and to stem the tide of cashout leakage. Fortunately, there are now clear indications that portability is almost here, and its arrival will streamline DC plans and dramatically improve participants’ retirement security.
Welcome to the new age of DC plan portability.
The Mobile Workforce Vs. Immobile Retirement Savings
For decades, the American workforce has been highly mobile. At the same time, DC plan-based retirement savings have been subject to high levels of systemic friction – where it’s easy for job-changing participants to cash out or “strand” their accounts, yet very difficult to move them forward to a new employer’s plan.
When an irresistible force meets an immovable object, something’s got to give. For DC plans, this has meant operating as leaky, revolving doors. For millions of participants, it’s severely damaged their retirement security.
- In the first year following a job change, 40% of participants become DC plan drop-outs, cashing out $92.4 billion annually (source: EBRI).
- About two-thirds of cashout leakage occurs simply because cashing out is the easiest option, while moving the funds to a new employer’s plan is complex, confusing and time-consuming.
- The demographic segments most affected by cashout leakage can least afford it, including minorities, women, lower-income and younger age groups.
Half-measures, such as traditional automatic rollovers, have provided plan sponsors with some relief, but produced dismal outcomes for participants. Allowing active participants to roll-in prior-employer balances has been helpful, but roll-in features have been poorly-utilized --- particularly when participants are forced to perform ‘DIY’ roll-ins. Finally, blanket policies to retain separated participants’ assets can marginally increase plan asset levels, but can also create legions of missing participants, piles of uncashed checks and rising plan costs.
These persistent realities have caused many to throw in the towel completely on private-sector DC plans.
The Dawn of Portability
Optimists say that it’s “darkest before the dawn” – and in the case of DC plans, I firmly believe that optimism is justified. There are now clear, across-the-board indications that true plan-to-plan portability is almost here.
Key developments include:
Independent research has now clearly demonstrated:
- The magnitude of the cashout leakage problem (Savings Preservation Working Group Issue Brief)
- The proven, plan-level benefits of a broad program of plan-to-plan portability (Boston Research Group Case Study), where cashout leakage can be reduced by over 50%
- The systemic benefits of auto portability, whether considered as a standalone policy initiative ($1.5 trillion in benefits), in tandem with other policy initiatives, or for its impact on specific demographic segments (EBRI Issue Brief)
To overcome systemic friction, two private-sector innovations have emerged:
- Auto portability is the routine, standardized and automated movement of an inactive participant’s small-balance retirement account from a former employer’s retirement plan to their active account in a new employer’s plan. Auto portability relies upon proprietary financial technology, as well as a network of participating recordkeepers and plans in order to locate, match and transfer retirement savings following a job change.
- Automation of plan-to-plan roll-ins for any participant, any balance. While the typical roll-in process is cumbersome, inefficient and confusing, the new industry best practice incorporates workflow automation, which isolates participants from its underlying complexities.
The Internal Revenue Service (IRS) and the Department of Labor (DOL) have promulgated important guidance supporting plan-to-plan portability:
- In 2014, IRS Revenue Ruling 2014-9 greatly simplified the process for plan administrators to confirm that a potential roll-in is a valid contribution.
- In 2018, the DOL issued Advisory Opinion 2018-01A, followed in 2019 by a final Prohibited Transaction Exemption (PTE). Together, these actions finalized auto portability’s regulatory framework.
As if to return the favor, the adoption of plan-to-plan portability would confer benefits upon public policy, where every past, present & future policy initiative that expands DC plan access and/or participation – every single one – would become vastly more effective in achieving their policy aims, when more of the incremental retirement savings they produce can be preserved.
Corporate Social Responsibility
DC plans are already firmly committed to incorporating socially-responsible features in their DC plans, as evidenced by the inclusion of Environmental, Social and Governance (ESG) criteria in plan investment options.
Importantly, in August 2019 the Business Roundtable released a statement redefining the purpose of a corporation. In the statement, 181 of the nation’s largest employers (including five large DC plan recordkeepers), agreed to promote “an economy that serves all Americans.”
For DC plans, portability could represent the next major ESG initiative, by delivering broad societal benefits – including benefits to minorities, women and others – and for making our private-sector DC plan system more efficient, more robust and sustainable.
Portability Makes Sense for Everyone
Since inception, DC plans have evolved from “supplemental plans” to their present status as the primary private-sector retirement savings vehicle for millions of working Americans. Similarly, corporations have evolved, explicitly acknowledging and acting upon their broader social responsibilities. With the retirement security of millions of Americans hanging in the balance, embracing DC plan portability makes sense for everyone.