By Neal Ringquist | March 15, 2022

For quite a while, a compelling case has been made for auto portability based on its positive impact upon America’s 401(k) system, including participants, plan sponsors, recordkeepers and asset managers – all of whom realize significant, quantifiable benefits when small-balance retirement savings are preserved within the 401(k) system.

While I firmly believe that financial advisors will similarly benefit from the adoption of auto portability, I also realize that a great many advisors may not “be there” yet, with many wanting to be better informed about what auto portability is, how they stand to benefit from it, and how they should assess auto portability’s prospects for success.

For advisors seeking answers on auto portability, I hope this article begins to provide them with what they need to know.

What is Auto Portability?
Put simply, auto portability is the routine, standardized and automated movement of inactive participants’ small balance retirement accounts from former employers’ retirement plans to active account in current employers’ plans.

Auto portability works through the application of patented, proprietary financial technology, and leading retirement research organizations believe that auto portability is a viable solution to reduce 401(k) cashout leakage and to preserve retirement savings.

Auto portability has a narrow focus and by regulation is applicable only to separated participants with balances less than $5,000, and subject to an adopting plan’s automatic rollover provisions. Historically, these participants have largely been ignored by everyone (including advisors), cash out at rates exceeding 70% or get forced out of their plan into dead-end safe harbor IRAs where their account balances languish, earning money market returns.

Auto portability’s narrow focus on small-balance job changers should reassure advisors that the new feature constitutes no threat to their business model and will likely never get between them and a client.

Auto Portability’s Benefits to Advisors
Not only is auto portability not a threat to advisors, but it will deliver a significant, long-term boost to their business model.

First, assets currently leaving the retirement system through cash out leakage would be largely retained. According to the Employee Benefit Research Institute (EBRI), $1.5 trillion in savings, measured in today’s dollars, would be retained by adopting auto portability for small balances. That’s a lot of additional AUM for advisors to manage.

In addition, an advisor whose plan sponsor clients adopt auto portability will benefit from ongoing, automatic transfers of small balances when new employees enroll. These automatic transfers will increase plan assets, improve plan performance, and create a fertile ground for future wealth management opportunities.

Auto portability “recycles” small balance accounts, turning them into valuable future retirement savings, and that value becomes apparent when it’s applied to an individual participant or plan sponsor:

  • In 2021, Alight Solutions projected that three sub-$5,000 cashouts for a participant in their 20’s would lead to a $295,000 loss in projected retirement savings at age 67 (assuming an 8% annual ROR).
  • In 2019, the Auto Portability Simulation projected that, for a 10,000 participant plan over 40 years, automatic roll-ins of small balances would increase plan assets by $100.3 million.

Auto Portability’s Prospects for Success
When auto portability experiences widespread adoption in America’s 401(k) system, it will usher in 100% fully automated, end-to-end portability for all small-balance job-changers. It will operate on a negative consent basis, where eligible participants have an opportunity to opt out.

Getting to full adoption may take some time, and as of this writing, 2 large recordkeepers with over 10 million participants have agreed to offer auto portability to their plan sponsor clients. More are on the way, so the adoption process has begun in earnest.

Despite this obvious momentum, there are still plenty of misconceptions about auto portability. Occasionally, advisors venture the opinion that anything less than 100% adoption means that auto portability will not work. On the contrary, real-world data indicates that auto portability will work side-by-side with “authorized” portability – a form of consent-based portability that occurs when former plan participants’ small balances are forced out of their plan and into safe harbor IRAs by plan sponsors and/or recordkeepers who are not yet part of the auto portability network.

While not technically part of an end-to-end auto portability connection, these accountholders can still avail themselves of auto portability’s benefits and have their account quickly and frictionlessly consolidated. We are so confident that authorized portability works because it’s been operating for almost four years, and we’ve consolidated thousands of participants’ accounts in this manner.

Key Takeaways for Advisors
There are several key takeaways for advisors regarding auto portability:

  • First, auto portability narrowly focuses on small-balance job changers, and as such, will not conflict with advisors’ business models.
  • Second, by increasing retirement savings and average participant balances, auto portability will increase advisors’ ongoing opportunities for wealth management.
  • Finally, auto portability’s adoption is well underway and is accelerating. While it’s being adopted, auto portability’s technology will allow for the consolidation of small balances from non-adopting plans on an affirmative consent basis.