What is Auto Portability?
Auto Portability is:
- The routine, standardized and automated movement of an inactive participant’s retirement account from a former employer’s retirement plan to their active account in a new employer’s plan.
- Serves the needs of participants subject to mandatory distribution provisions of their employer-sponsored plan (separated participants with account balances less than $5,000) to curb excessive cash out leakage occurring as participants change jobs.
- Could be adapted to larger account balances, should public policy dictate a higher mandatory distribution limit.
Why is Auto Portability needed?
Factors Driving Auto Portability:
- Mobile Workforce: America’s workforce is more mobile than ever before, changing jobs, on average, over 7.4 times during their working career, resulting in an estimated 13.6 million annual job-changers with retirement accounts.
- Explosion of Small Accounts:
- Over 5 million of these participants (28% of annual job changers) have less than $5,000 in their account and are subject to a mandatory distribution from their former retirement plan into a Safe Harbor IRA.
- An additional 2 million participants (18% of annual job changers) have less than $15,000 in their account at the time of their job change.
- Adverse Outcomes: Small-balance, job-changing participants are making poor decisions, creating adverse consequences for their retirement savings and readiness.
Adverse consequences include:
- Leakage/Cash-Out Rates: At job change, participants with less than $5,000 cash out their savings at rates approaching 60%. Of those whose savings are placed in a Safe Harbor IRA, an additional 29% cash out by the 7th year following their job change. Thus, almost 90% of small-balance job changers cash out their accounts!
- No Action Taken: Participants with less than $5,000 who don’t respond to notices are forced out of their retirement plan and into a Safe Harbor IRA, where low money market returns combined with annual administrative fees deplete their savings over time.
- Lost/Missing Participants: Separated participants change residences but fail to update their address or lose track of their old accounts. These savings are similarly depleted by fees or lost via escheatment to their state of residence. 3% to 5% of all retirement accounts are classified as lost/missing.
What are the benefits of Auto Portability?
- Reduces Leakage & Increases Savings: Systematically consolidates savings in a new employer’s plan when accounts are small and most at risk of being cashed out. Over a generation, savings amount to $1.3 trillion, when applied to accounts with less than $15,000.
- Reduces Duplicate Accounts & Plan Costs: Elimination of duplicate accounts reduces unnecessary costs incurred by both plans and their participants.
- Minimizes Lost / Missing Retirement Accounts: Fewer accounts classified as “lost/missing” since fewer accounts are stranded across all qualified plans.
- More Appropriate Long-Term Investment Allocation: Savings rolled into an active plan are invested in the plan’s default investment option, with potential to produce compounded earnings of 5%-7% per year over a long investment horizon, a significant multiple of interest earned in funds available in Safe Harbor IRAs.
- Reduces Friction & Increases Portability: Solves the systemic frictions that frustrate saver’s best intentions to retain and grow their retirement nest egg. These frictions are most evident at the time of a job change.
- Boosts 401(k) Participation: By solving the small account problem, Auto Portability will increase usage of auto enrollment features, known to boost participation — particularly in minority and women’s demographic segments.
How does Auto Portability Work?
There are 4 basic processes:
- Notices: Upon becoming subject to a mandatory distribution, legally-required notices are provided to participants.
- Locate & Match – Electronic Records Matching: Account information is provided to the clearinghouse, which works with recordkeepers to locate and identify “matches”.
- Consent: Participant consent is obtained, if affirmative consent is required.
- Automatic Roll-In: Inactive account is closed and balance is rolled into the participant’s new-employer plan. Participant is notified when their savings are consolidated.
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