In late 2017, retirement industry observers breathed a collective sigh of relief when “Rothification” of 401(k) plans, once considered as a part of new tax legislation, was abandoned. With Rothification in the rear-view mirror, policymakers have begun turning their attention to other, more-promising initiatives.
Two retirement savings public policy initiatives – auto portability and the problem of missing participants – are very likely to see significant progress in 2018. Both initiatives enjoy strong bipartisan support, promise to streamline and strengthen America’s defined contribution system, and will preserve the retirement savings of millions of Americans by ensuring that their savings move forward when they change jobs.
Auto portability is the routine, standardized and automated movement of an inactive participant’s retirement account from a former employer’s retirement plan to their active account in a new employer’s plan.
Retirement Clearinghouse (RCH) has been advocating for auto portability for balances below $5,000 – those subject to mandatory distribution - given the high cash out rates experienced with these accounts.
Auto portability’s benefits are impressive. In March 2017, Jack VanDerhei, Research Director with the Employee Benefit Research Institute (EBRI) presented new research that indicated a potential $1.5 trillion of retained retirement savings from auto portability, when applied to these small balance accounts.
To date, a hurdle to the widespread adoption of auto portability has been the need for legal guidance from the Department of Labor (DOL) -- guidance that would serve to mitigate any perception of fiduciary liability on the part of plan sponsors for the automatic roll-in of participants’ funds.
There are strong indications that guidance from the DOL will be forthcoming in 2018:
- In July 2017, a group of 11 Republican Senators, led by Senator Tim Scott (R-SC), plus 11 trade organizations, sent a letter to DOL Secretary Alexander Acosta, requesting that the DOL provide guidance for auto portability.
- In November 2015, a similar letter was sent by 11 Democratic Senators and Congressmen to former DOL Secretary Perez.
- Since 2013, RCH has been working with the Groom Law Group to obtain the DOL’s guidance on auto portability. Based on recent meetings with the DOL, Groom Law reports that guidance for auto portability is now a priority, and believe that guidance will be forthcoming in 2018, in the form of a Prohibited Transaction Exemption (PTE), an Advisory Opinion or both.
A second public policy issue – locating missing participants – is likely to receive a great deal of attention and clarification in 2018, similar to auto portability, a solution that effectively addresses the problem of missing participants will preserve and protect the retirement benefits of millions of Americans, particularly those who are due to receive retirement benefits.
The missing participants issue was highlighted in August 2013, when the ERISA Advisory Council issued their report to former DOL Secretary Perez on Locating Missing and Lost Participants. Earlier, on June 4, 2013, RCH delivered testimony before the ERISA Advisory Council on the ‘best-practices’ for locating missing participants -- much of which appears to have been incorporated into Field Assistance Bulletin 2014-01 (FAB 2014-01).
In FAB-2014-01, the DOL offered guidance to plan fiduciaries for locating missing participants when terminating a plan. Unfortunately, FAB 2014-01 did little to provide guidance to fiduciaries of active plans, resulting in confusion and inconsistent enforcement actions. At the same time, the problem of missing participants has grown, due to the combination of auto enrollment and higher employee mobility, resulting in urgent appeals for guidance from the DOL.
Aside from the DOL, another federal agency offering a partial solution for missing participants is the Pension Benefit Guaranty Corporation (PBGC), which will begin to exercise its authority to deal with missing participants in terminating defined contribution plans. In December, the PBGC officially expanded their missing participant program to accept the balances of unresponsive participants from terminating defined contribution plans.
On the legislative front, this past fall, Senator Elizabeth Warren (D-MA) and Senator Steve Daines (R-MT) were reported to be circulating edits to the Retirement Savings Lost and Found Act, originally introduced in June 2016. Among other things, the Act proposes the creation of a national registry for participant contact information. The Social Security Administration and the Department of the Treasury are identified in the bill as responsible for administration of the registry.
Retirement Clearinghouse believes that the optimal solution for small, missing participant accounts is auto portability, as this creates a new default where balances automatically move forward and are consolidated in an active participant defined contribution plan. The plan where the participant is active is the plan that will have the current participant information. In addition to the retention of savings in the retirement system (as documented by EBRI), auto portability would simultaneously reduce the incidence of missing participants as accounts are located and matched and rolled into their active employer plan, creating a private-sector, optimized approach to resolving missing participant issues. At a minimum, the auto portability “locate and match” process can be leveraged by any missing participant registry.
In December, RCH met with the staffs for Senator Warren and Senator Daines to provide input on the Retirement Savings Lost and Found Act. RCH recommended that the bill add language that the registry perform both an initial and annual locate and match against all retirement plans and accounts, and the Treasury could use a “commercial” service for this function. Locate and match functionality, a foundational process for auto portability, would use the up-to-date information that is associated with a current employee participating in an employer plan as a significant new source of data for locating participants that have neglected to update their account information in a former employer’s plan. RCH was encouraged by the positive response to our recommendations provided for the Retirement Savings Lost and Found Act, and look forward to seeing the next iteration of the bill in 2018.
The asset retention benefits of auto portability are undeniable, as quantified and publicized by EBRI in 2017. The by-product of an auto portability implementation is the significant reduction in missing participants that plague the retirement system, yet another public policy win for auto portability.
RCH believes that 2018 will be the year that Washington affirms this.