Auto portability seen as plug for 401(k) leaks

If more record keepers follow its lead, Alight Solutions says it's confident that one of the industry's most vexing problems — the loss of some $6.6 billion from 401(k) retirement savings accounts annually through employee cashouts — would soon start to wane.

The record keeper was the first to make auto portability available to its plan sponsor clients and is looking to others to do the same, said Greg Long, Alight's Washington-based director of public policy.

"As more record keepers come on board, this becomes more and more valuable," he said, referring to the relatively new concept of auto portability.

The new auto-portability service, which Alight made available in the middle of 2021, ensures that small account balances that are typically forced out of retirement plans when workers leave their jobs are automatically moved to the plans of their new employers. The service is being offered through the Retirement Clearinghouse LLC, a company that specializes in retirement account rollovers.

"Leakage is a massive problem in the 401(k) area," Mr. Long said, referring to cashouts and other ways that money leaves or "leaks out" of retirement accounts.

Some 5.3 million 401(k) participants with less than $5,000 in their accounts leave their jobs annually, according to a simulation model built by the Retirement Clearinghouse. Of those, 4 million cash out their accounts, removing an estimated $6.6 billion annually from retirement plans. The model is based on data from several sources, including the Employee Benefit Research Institute, the Department of Labor's Form 5500 datasets, and studies from Alight, the Vanguard Group Inc. and Fidelity Investments.

With a record number of people quitting their jobs amid the "Great Resignation," some industry analysts worry that the leakage problem could get even worse. "We do believe the Great Resignation exacerbates the leakage problem," said Neal Ringquist, Retirement Clearinghouse's Lafayette, Calif.-based executive vice president and chief revenue officer.

Plan sponsors are permitted by law to kick out small accounts with balances under $5,000 when workers leave by offering them an option to either cash out their balances or transfer the funds to an individual retirement account or the worker's new employer's plan. Neither the cashout nor the IRA rollover option is ideal. Participants who cash out their balances are taxed on their distributions and are hit with a 10% early withdrawal penalty if under the age of 59½. Those that transfer their funds to an IRA often wind up paying much higher fees than they were in their 401(k) plan. And if a participant doesn't make a choice, the plan sponsor can roll that money into an IRA for the participant or send the participant a check.

Alight's Mr. Long describes the IRA rollover money as a "decaying asset." The money must be invested into a cash-equivalent investment, which he says typically have fees that are greater than the return.

Mr. Long also feels for participants who opt to take a check and cash out. "There is an enormous amount of money that is being penalized, then taxed and then spent that is intended to be money that should be saved for retirement," he said.

The Retirement Clearinghouse in July 2019 gained an edge on its competitors when it received a prohibited transaction exemption from the Department of Labor that allowed it to automatically move funds on a so-called negative-consent basis, meaning it could transfer funds without participants explicitly giving their consent to the rollover. Typically, participants have to affirmatively "opt in" to have their account balances move to another employer's plan.

Retirement Clearinghouse — the only retirement account rollover company to have such an exemption from the Labor Department — is looking to build out its network of participating record keepers. So far, it has two: Alight and Vanguard, which joined the clearinghouse in September and is expected to offer an auto-portability service to its plan sponsor clients this year.

"We feel that we'll have more joining the network in the not-too-distant future," Mr. Ringquist said, referring to record keepers. He declined to say which or how many record keepers are expected to join the network or when. "We are under non-disclosure agreements with prospective record keepers and cannot be more specific," he said.

Record keepers have been slow to come on board due to the lengthy due diligence process they must go through with the clearinghouse, he added. After record keepers clear that hurdle, they must weigh auto portability against other project priorities.

"In some instances, it could take a year or two to work up a priority queue," he said.

Participating record keepers will use the same pricing to charge participants for the auto-portability service, in accordance with the pricing spelled out in the prohibited transaction exemption the Labor Department granted Retirement Clearinghouse, Mr. Ringquist said.

Participants pay a one-time transaction fee for balances successfully rolled into their current employer's plan. The fee is based on account size and is never more than $59, Mr. Ringquist said.

Alight so far has signed on a "handful of plan sponsors" — less than 10, said Mr. Long — who have added auto portability to their retirement plans. Combined, that's 120,000 people who are now eligible to have their small accounts moved, he said.

Virtually all plan sponsors he's talked to think auto portability is a good idea, but most don't want to be first, preferring to wait until there's more people in the clearinghouse, Mr. Long said.

Mr. Long anticipates that auto portability in time will "be standard operating procedure" not unlike auto enrollment and auto escalation as more plan sponsors implement the service and their concerns about being among the first recede.

Also, Mr. Long sees auto portability in retirement plans as being especially useful for employers in low-wage, high-turnover industries. One of its plan sponsor clients that signed up for auto portability, for example, is a large supermarket chain where jobs "bagging groceries and stocking shelves" are neither high-paying nor long term, he said.

"Those are the types of companies that need it more," he said, referring to auto portability.

Vanguard, too, anticipates strong interest from employers with high turnover. Auto portability should be appealing to all plan sponsors but particularly to "plan sponsors that tend to have a higher proportion of lower-wage or low-income workers or plan sponsors that tend to have a very fluid workforce," said David Stinnett, principal and head of strategic retirement consulting at Vanguard in Malvern, Pa.

Vanguard is working with Retirement Clearinghouse to implement the auto-portability service and is talking to plan sponsors about it, he said.

"Plan sponsors are interested to find out more once the service is fully available," Mr. Stinnett said.

Both Messrs. Stinnett and Long share the view that auto portability can help alleviate racial disparities in retirement savings.

Leakage disproportionately harms racial minorities and low-income people, but to the extent that auto portability can solve the problem, "those people are disproportionately helped," Mr. Long said.

For all the benefits auto portability offers participants with small balances, awareness among plan sponsors for now appears to be low, according to an online survey by the Plan Sponsor Council of America conducted in November.

The vast majority of the 79 plan sponsors that responded — 78% — said they never heard of auto portability. Only 7.8% were considering implementing an auto-portability feature in their plans.

"I'm not surprised," said Robyn Credico, North America defined contribution consulting leader at Willis Towers Watson PLC in Las Vegas. "We have not seen a lot of plan sponsors ask for this."

Ms. Credico believes awareness of auto portability will grow as more record keepers make the service available and promote it.

"It's a good idea if the record keepers support it," she said.