A new auto aims to drive retirement savings
Its called auto-portability, and it would enable a
separating employee to easily roll assets into a new
employers plan. While the notion has been percolating for
some time, a growing body of research is highlighting the
benefits of consolidating employee assets so they can better
grow their retirement nest eggs.
Without a coherent, unified retirement system in the U.S., the
Sisyphian task of building one has long been taken in
incremental steps. The effort to ensure the American workforce
is saving for retirement has given American workers, for
example, auto-enrollment and auto-escalation, devices that move
more people into workplace retirement savings plans and
increase their savings rate over time.
Now, some defined contribution plan experts are hoping that
soon, all job changers will be able to hold on to one
retirement account throughout their careers.
We call it the small account problem, says Spencer
Williams, founder, president and CEO of Retirement
Clearinghouse, a provider of portability and consolidation
services for recordkeepers and plan sponsors. While
auto-enrollment has helped grow the number of 401(k) accounts,
47 percent of all people changing jobs each year have account
balances under $5,000 (a total of 7.3 million workers) due to
an increasingly mobile workforce, says the Employee Benefit
Research Institute (EBRI). These small accounts often get left
behind or lost as their owners, most often low- or
middle-income workers, move on.
According to a February 2016 study from the Defined
Contribution Institutional Investment Association (DCIIA)
entitled, Plan Leakage: A study on the psychology behind
leakage of retirement plan assets, the length and
complexity of the process of moving assets from one employer to
the next creates barriers to success. If these barriers were
eliminated, the study concludes, more plan participants would
hold on to their assets.
Trying to eliminate barriers as we did with
auto-enrollment will be critical to improve the leakage,
says Sabrina Bailey, head of Retirement Solutions, at Northern
Trust Asset Management, pointing out that today, 40 cents of
every dollar in a defined contribution plan leaves the plan
before its owner turns 55. (Some of those assets leave in the
form of loans, another barrier to savings).
In 2013, the Retirement Clearinghouse asked for an advisory
opinion from the Department of Labor on the topic of
portability. It did so, the firm says, because in the system
that it envisions, plan assets would become portable for
employees who not only give affirmative consent, but also for
those who give no consent, just as in auto-enrollment.
The DoL has yet to release a response to the Retirement