Industry-led auto-portability network ready

While it's not the Dream Team coming together to win Olympic gold or the Avengers assembling to save humanity, as far as the retirement industry goes, the nation's top record keepers forming a group aimed at reducing plan leakage and improving participants outcomes is a major development, stakeholders said.

The Portability Services Network, an industry-led auto-portability consortium, officially goes live Oct. 1, and sources believe it will have a positive impact.

"Never before have major competitors all sat around the same table, not focused on how they can compete with each other, but focused on how they can work together for the good of the undersaved and underserved," said Dave Gray, head of workplace retirement offerings and platforms at Fidelity Investments. "It has been an incredible experience in great partnerships, commitment to a common cause, a commitment to common principles."

Fidelity, Vanguard Group and Alight Solutions, in coordination with Retirement Clearinghouse, which has developed a service that helps automatically move participants' savings into retirement plans at their new employers, announced the formation of the Portability Services Network in October 2022. Since then, Empower Retirement, TIAA-CREF and Principal Financial Group have joined as owner-members, representing about 82 million workers across more than 185,000 employer-sponsored retirement plans, according to PSN.

The six record keepers and Retirement Clearinghouse jointly own the PSN. Each record keeper that has joined so far or that might in the future will sign the same operational agreement. The same is true for any plan sponsor. "The nature of Portability Services Network is such that it creates a level playing field for record keepers, a level playing field for plan sponsors, a level playing field for participants," said J. Spencer Williams, founder, president and CEO of Retirement Clearinghouse, or RCH.

When a participant with less than $5,000 — and as of Dec. 31, $7,000 — in a 401(k) plan changes jobs, plan sponsors can offer them the option to cash out their balances, or transfer the funds to an individual retirement account or the worker's new employer's plan. But those who 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. The IRAs are typically invested in either a money market fund or certificate of deposit, which do not offer high returns.

Greg Long, head of public policy at Alight, said the industry recognized there was an issue with millions of small accounts that often lead to plan leakage when a participant changes jobs.

"So we took it upon ourselves to say, 'What's the right way to solve it?' and importantly, to do it as a utility," Long said. "Like a service that we all leverage, just like your public water and gas utilities: Everybody uses it, they pay a fee to maintain good service, but nobody at the water company is getting rich. And that's the idea of PSN: To create a service that solves a problem that helps everyone, it makes the entire system more healthy, but it's a not a profit-making motive."

None of the six record keepers that have joined the PSN as owner-members, nor any other record keepers that join the network in the future will receive a dime from conducting an auto-portability transaction, according to Williams.

When the network identifies an account to transfer to a new employer's plan, it will then charge the participant a maximum one-time fee of $30. That money will go to the network itself to cover operating costs, Williams explained, and the PSN will likely reduce fees as it gains scale.

An estimated $92 billion in savings left the U.S. retirement system in 2015 because Americans who switched jobs prematurely cashed out their workplace retirement accounts and paid taxes and penalties on those cashouts, according to the most recently available Employee Benefit Research Institute data.

Sources said the PSN can help reduce that figure.

"Too many individuals with small account balances (and who) change jobs are forced out of the retirement system, either lost to cash or lost into IRAs," Gray said. "What we want to do is improve outcomes for the undersaved and underserved workers and allow of them to have their money move with them as they change jobs."

Vanguard joined the PSN to use its influence in the industry to support auto portability and better serve "a segment of participants who have traditionally been underserved and underrepresented," said Steve Holman, head of the distribution enablement group in Vanguard's institutional investor group. "These are the folks that need help to preserve their savings in retirement, and auto portability is an incredibly elegant solution to achieve that."

Traditionally, women and minorities are most likely to possess small account balances, Holman noted.

Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, said retaining assets in the retirement system will produce better outcomes for workers. "It's going to keep people's money with them as they go, and it gives them a better way of keeping track of the money, instead of resulting in a cashout," he said, noting the importance of compounding assets over time.

Prior to the PSN's launch, Alight in 2020 announced that it would implement auto portability for its clients using RCH's platform, and Vanguard did the same in 2021.

Now, Fidelity, Vanguard and Alight will each have clients live on PSN this year while Empower, TIAA and Principal are working on building the necessary back-end technology and are likely to go live on the network in 2024 or 2025.

While representatives from Fidelity, Vanguard and Alight each declined to name their plan sponsors clients that have already agreed to join the PSN, they added that interest is high.

"Plan sponsors have to make an affirmative decision to be connected" to the PSN, Gray explained. "It is Fidelity's expectation that almost all of our plan sponsors will choose to do so."

Added Vanguard's Holman, "I am so convinced … once the word truly gets out, this thing's just going to take off. The benefits are so clear and the requirements for plan sponsors to participate are so modest, like it's a no-brainer. Everyone benefits."

Will Hansen, executive director of the Plan Sponsor Council of America and chief government affairs officer at the American Retirement Association, said plan leakage is a major concern for his members and the PSN has potential to help.

"Plan sponsors desire more options on helping to decrease leakage as well as ensure they don't increase the number of participants that they can't locate once they leave employment," Hansen said. "The program will hopefully accomplish a decrease in both: leakage and lost participants."

Auto portability has been the main focus of RCH for years, and in 2018 and 2019, the Department of Labor released guidance that allowed RCH to significantly expand the use of auto portability by allowing negative-consent roll-in contributions of small balances.

And in December 2022, Congress, under a bipartisan retirement security package known as SECURE 2.0, codified into law the use of negative-consent roll-in transactions and extended the minimum auto portability threshold to $7,000 from $5,000.

With the recent developments out of Washington and the buy-in from a super team of record keepers, the PSN has the possibility to reshape major segments of the retirement industry, RCH's Williams said.

While the focus is now launching the network to assist with small account balances and getting plan sponsor support, the PSN could one day set even bigger goals.

"We've created a network through which the industry comes together to solve problems," said Neal Ringquist, RCH's executive vice president and chief revenue officer. "Cashout leakage is the first, but there will be others that you could see the industry, through PSN, addressing in the not-too-distant future."

Added Williams: "We're creating a network, which is an electronic highway for the transmission of data and if necessary, transmission of money. It's hard not to look at that network … that once we have the network up and operating, it certainly could be used to transfer larger account balances."