By Tom Hawkins
Auto portability is a new “automatic” plan feature that is rapidly gaining acceptance by large defined contribution recordkeepers serving almost 10 million participants. While the feature is relatively new, it has received a great deal of attention in the media and has also been the beneficiary of definitive regulatory guidance, promulgated by the Department of Labor (DOL).
Despite this, significant misconceptions persist about auto portability. Here are the top five:
1. Only terminated participants with small balances will benefit from auto portability.
Terminated participants are only half of the auto portability story, as one plan’s terminated participant soon becomes another plan’s new hire.
- New plan participants will enjoy the benefits of increased retirement savings consolidation, which helps them avoid cashouts, saves them time & money and greatly simplifies their retirement planning.
- Over time, plans will see as many automatic roll-ins for their new hires as terminated participants whose balances leave the plan.
- Plans will benefit from lower numbers of terminated small balance account, as well as significantly higher average balances, which both serve to lower average plan costs, as well as a decreased incidence of missing participants and uncashed checks.
2. Everyone must adopt auto portability before it can work.
During auto portability’s initial adoption phase and beyond, end-to-end auto portability will easily coexist with safe harbor IRAs originating from automatic rollovers from non-adopting plan sponsors, providing easy portability for a diverse group of plans and participants.
Known as “authorized portability” – consent-based portability works when:
- A locate-and-match algorithm links a non-auto portability safe harbor IRA to a new account with a plan that’s adopted auto portability.
- The located & matched participant is notified and provides their consent via web, IVR or call center.
- An automated roll-in follows, along with confirmation to the participant.
Research indicates that a consent-based framework delivers high levels of participant location, matching and affirmative consent – resulting in fully automated roll-ins.
3. Participant protections are not sufficient under auto portability.
On the contrary, auto portability’s participant protections represent an enhanced standard of care for participants subject to mandatory distributions.
The DOL’s Advisory Opinion 2018-01A establishes a protective framework that addresses:
- Participant searches
- Transparency of fees
- Required notifications
- Program reporting
Finally, the technical architecture of auto portability ensures that participant data is securely transferred, and its result – consolidation – serves to lower overall cybersecurity risks.
When compared against other safe harbor IRA practices, participant protections are dramatically enhanced by auto portability.
4. Auto portability is complex for plan sponsors to evaluate, adopt and administer
Not at all.
- Consistent with the selection of any automatic rollover IRA provider, a plan’s fiduciary performs one-time due diligence and signs a services agreement.
- Plan documents may require amending, including allowing plan roll-ins, authorizing automatic rollovers for all balances below $1,000 and disclosing auto portability program fees.
5. Auto portability is expensive for participants.
At most, participants pay a modest consolidation fee ($59) and in some cases, a monthly account maintenance fee, making auto portability considerably less “expensive” than the alternatives of cashing out or performing a “do-it-yourself” (DIY) roll-in.
For example, a 30-year-old:
- Cashing out $1,679 will net only $1,175, after paying taxes and penalties
- Expects to spend anywhere from 5 to 19+ hours attempting to perform a DIY roll-in
- Avoiding a cashout via auto portability will have $17,926 at retirement
That’s why the 2021 EBRI Retirement Confidence Survey found that nearly 9 in 10 plan participants surveyed thought that an auto portability feature would be valuable.Back