Auto portability can do for job transfers what auto enrollment and auto escalation have done for 401(k) participation and deferral. In fact, when an Auto Portability Simulation (APS) model was recently unveiled at EBRI’s policy forum, attention was paid to the top line numbers, and rightly so. The simulation revealed a $154 billion reduction in 401k leakage, as well as the $115 billion increase in plan-to-plan roll-ins that occur under the adoption of auto portability.
Those numbers, while dramatic, weren’t the only interesting outcomes yielded by the APS.
Closely examining the year-by-year results, we noticed something odd. When comparing the “No Auto Portability” and “Auto Portability” scenarios, there were decreasing numbers of job-changing participants with less than $5,000 under the Auto Portability scenario.
Over the simulation’s timeframe, the effect became quite pronounced: by 2045, Auto Portability had resulted in 40 million fewer job-changers with less than $5,000.
Initially, this didn’t make sense. With identical assumptions on the number of job-changers in each scenario, why would this population begin to decline under Auto Portability?
Our confusion was soon resolved, when we realized that the combination of reduced leakage and increased plan-to-plan roll-ins had served to increase the retirement savings balances of a large population of participants.
As the Auto Portability Simulation moved millions of participants from job-to-job, located their new plan and consolidated their balances, it was effectively lifting a large percentage of them out of the lowest-balance segment. Because these participants had already realized a significant benefit from Auto Portability, they were no longer eligible for the plan feature. Put simply, the scenario where a participant has six stranded small balance accounts at former employer 401(k) plans disappears under Auto Portability.
This unexpected outcome not only revealed the power of portability, it also revealed the power of a dynamic, discrete event simulation.
Thomas Hawkins is vice president of sales and marketing with Retirement Clearinghouse.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
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