The Next Step for 401(k) Innovation: Auto-Portability
Retirement plan owners with small balances need a simple, easy means to bring assets to their next employer’s 401(k), experts say.
A new “auto” aims to drive retirement savings higher.
It’s called auto-portability, and it would enable a separating employee to easily roll assets into a new employer’s 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 Clearinghouse request.