401(k) auto portability making critical turn toward acceptance

While the use of auto portability for handling 401(k) accounts upon termination of employment might one day be ubiquitous, its first major rollout is expected next year.

After years of groundwork, Retirement Clearinghouse LLC received the green light from the Department of Labor to expand its auto-portability program, which experts expect will significantly reduce plan leakage and missing participants. The green light came by way of several pieces of guidance — a November 2018 advisory opinion that identified RCH as the fiduciary when a participant's small-balance terminated account or safe-harbor IRA are automatically rolled into a participant's current employer plan, and a final prohibited transaction exemption issued in July.

The prohibited transaction exemption, which was specifically granted to RCH, was required because RCH charges a fee to participants for its service.

When fully operational, the one-time fee RCH charges participants will average about $35 and can go as high as $59 for larger account balances, according to RCH.

No other company has publicly announced work on auto portability for 401(k) plans so far, sources said.

The Labor Department guidance was "the starting gun" for service providers and plan sponsors looking to adopt auto portability, said Michael P. Kreps, Washington-based principal at Groom Law Group LLP, which represents RCH.

The next step to widespread adoption is getting record keepers on board, said J. Spencer Williams, founder, CEO and president of RCH in Charlotte, N.C. "We are in deep and intense conversations with record keepers about how and when they will implement the technology so that their customers can then adopt it," he said.

Ever since the prohibited transaction exemption was granted, stakeholders have been more receptive to auto portability, said Neal Ringquist, RCH's executive vice president and chief sales officer. "I would say we've had more meetings and orientations with plan sponsors, consultants and, specifically, record keepers since July 30 than we had the prior five years combined. There's that much interest in auto portability."

RCH has completed an auto-portability orientation with 17 of the nation's top 21 record keepers in terms of market share, according to Mr. Ringquist. It plans an initial launch of its program with roughly four record keepers in the fourth quarter of 2020, he added. He declined to provide names of the providers.

"I'm pretty confident that we will have at least 25% (of the record-keeper) market share on that initial rollout and it could roll as high as 40% depending on one or two players," Mr. Williams said.

Timothy Rouse, executive director at the SPARK Institute, which represents retirement industry firms such as record keepers, investment advisers, mutual fund companies and benefit consulting firms, said record keepers support auto portability and any effort to preserve retirement assets.

"To be able to implement auto portability you have to be able to implement a network," Mr. Kreps said. "You have to build the pipes between the record keepers and all the plans."

RCH set out to do just that about six years ago, starting work on a service that would help automatically move participant savings back into retirement plans at their new employers.

Currently, when a participant with less than $5,000 in a 401(k) plan changes jobs and does not move his or her money, the plan can transfer the assets into an individual retirement account. The IRAs are then typically invested in either a money market fund or certificate of deposit, which do not offer high returns. Balances of more than $5,000 stays in the company plan, unless the participant moves it.

RCH has developed a "locate, match and transfer" technology that involves periodic queries of cooperating record keepers' systems to ascertain if the IRA owner has become a participant in an individual account plan through re-employment and then effects a transfer of funds from the individual's IRA to that new plan, according to the Labor Department advisory opinion.

Assets must first travel through a safe-harbor IRA before moving to a new employer plan.

Auto portability and its locate-and-match technology will reduce the number of missing participants, Mr. Kreps said. "Once (record keepers) can talk to each other, then they can use it to locate missing participants," he said. "When you find a person in an active plan you would have their most current employment info and their address."

The plan sponsor community is also interested in auto portability, said Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington. "I think when some big plans get involved, more will follow," she said.

"It just needs a nudge to get plan sponsors and the service providers holding the assets actively involved in this, and once it hits critical mass I think it's something we'll see pretty widely across the retirement system," Ms. Robinson said.

To demonstrate auto portability's viability, RCH launched a pilot program in 2017 with one plan sponsor in the hospital services industry; RCH has declined to name the sponsor. Of the company's roughly 250,000 employees, RCH has found about 7,500 retirement plan participants who already had a safe-harbor IRA provided by RCH through its record-keeping services.

Safe-harbor IRAs are created when sponsors force out terminated employees with retirement account balances of less than $5,000.

The 7,500 participants were invited to transfer their IRA balances into the company's retirement plan and roughly 1,500 have given their consent. Now that the Labor Department has issued a prohibitive transaction exemption for RCH, it can move the remaining IRA balances into the company's plan without participants' consent, but RCH hasn't decided when that will happen, Mr. Williams said.

Using auto portability for handling 401(k) accounts upon termination of employment would significantly reduce plan leakage, according to a study released in August by the Employee Benefit Research Institute in Washington.

EBRI estimated $92.4 billion was lost in 2015 because of leakage from workers cashing out their 401(k)s.

As part of the study, EBRI looked at auto portability as a stand-alone policy initiative. It found that under "partial" auto portability, those currently ages 25 to 34 are projected to have an additional $659 billion in their accounts over a 40-year period, while "full" auto portability is projected to yield that cohort an additional $847 billion over the same time.

In the study, full auto portability is when every participant is assumed to consolidate their savings in a new employer's plan every time they change jobs (all participants arrive at age 65 with one account). Partial auto portability is when every participant with less than $5,000 (indexed for inflation) consolidates savings in their new employer's plan every time they change jobs. In both scenarios, any leakage is limited to hardship withdrawals.

"How do we get more people to keep their money in the system?" Mr. Williams said. "We tell them we're going to move their money to their new employer plan and make them tell us that they want it otherwise. It's pure behavioral economics backed up by technology and a seamless technology experience."

According to RCH's auto-portability simulation, which uses data from EBRI, there are an estimated 5.3 million defined contribution plan participants with balances of less than $5,000 who change jobs every year. Moreover, about 4 million of those job changers eventually will cash out their plans.

Since keeping assets in retirement plans is a goal all stakeholders share, Mr. Williams said auto portability will soon be commonplace. "Whether it's us or a competitor, over the next five years, we think auto portability becomes ubiquitous in plans," he said. "Nobody could answer the question, 'Why wouldn't I do this?'"