Since the birth of the 401(k) plan in 1980, several innovations have transformed and improved its effectiveness. Automatic enrollment, on average, improves plan participation by 25%. Target-date funds, investment advice and managed accounts dramatically improve the asset allocation and risk profile of savers. Technology innovations make it easy to access balances and transact from anywhere, at any time.
The portability of accounts from job to job, however, remains in the dark ages of paper checks and manual processing. The difficulty of plan-to-plan transfers is a major obstacle for workers trying to reach their personal savings goals, and it's also contributing to a nationwide retirement savings shortfall, especially among minority and low-income workers.
Enter automatic portability which, like most great ideas, is a simple concept — reduce leakage from retirement plans by creating a networked system of record keepers, with a central clearinghouse, to move small balances from plan to plan with the worker. With auto portability, the small balances that leave the plan to be invested in money market funds and eroded by safe-harbor IRA fees are instead rolled forward and defaulted to a qualified default investment alternative (typically a target-date fund) in the new plan. The mandatory distribution practices are essentially converted into a "recycling" operation.
The benefits of auto portability are twofold: For the worker, the new default reduces cash outs (no longer the easiest choice), avoids redundant or excessive fees and maximizes retained savings, thereby improving retirement outcomes. For the plan sponsor, the result is a process that removes terminated accounts (missing workers, uncashed checks) and incubates new hire accounts.
Auto portability is the brainchild of Retirement Clearinghouse, with whom Alight is partnering on the launch of a nationwide program that encourages record keepers and their plan sponsor clients to help fix problematic distribution practices. According to the Employee Benefit Research Institute, more than 5 million Americans leave jobs annually with defined contribution plan account balances of less than $5,000, and more than half of those workers have their money leak out of the qualified system within a year. When looking at demographics, this leakage is most damaging to Black and Hispanic workers and those in the lowest income brackets.
The data in support of auto portability is compelling. Research conducted by Alight found that a majority (56%) of plan sponsors are interested in an automatic rollover program that can help workers who are subject to mandatory distribution, and we expect that number to grow quickly. Further, EBRI explored the macro impact of auto portability and found that, when fully implemented, it would preserve nearly $1.5 trillion in additional retirement savings for U.S. workers over a 40-year period. That includes about $619 billion for minority workers.
The U.S. Department of Labor has also demonstrated support for auto portability through issuance of a prohibited transaction exemption to RCH and advisory opinion, which creates a safe harbor for plan sponsors accepting auto portability roll-ins. Further, auto portability has strong bipartisan support from Congress.
However, industrywide change requires more than just building a better mousetrap. Every once in a while, an innovation arises that checks all the right boxes — something that truly benefits workers, plan sponsors, service providers and, collectively, the country. Automatic portability is that next innovation and it's time for retirement industry leaders to make it real.
Since every trend needs to start with somebody, Alight is all-in on auto portability, and we hope that you will be, too.
Alison Borland is executive vice president of wealth solutions and strategy at Alight Solutions, based in San Francisco. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.
