In the world of retirement savings, auto portability has emerged as a transformative solution designed to address the persistent problem of cashout leakage – when employees cash out their retirement savings upon changing jobs, rather than moving their savings forward into their new employer-sponsored plan.
As both defined contribution recordkeepers and their plan sponsor clients increasingly recognize the benefits of auto portability, its adoption has begun to accelerate. Market adoption theory provides a useful framework for explaining why auto portability is on the cusp of becoming a mainstream feature in retirement plans.
Auto portability is a financial technology that automatically transfers an employee’s retirement savings from their former employer’s plan to their new employer’s plan when they change jobs. This seamless transfer helps prevent cashout leakage, which has been a significant drain on retirement savings. According to the Employee Benefit Research Institute (EBRI), cashout leakage costs Americans an estimated $92 billion annually in lost retirement savings. By automating the plan-to-plan transfer, auto portability not only preserves retirement savings but also simplifies the administrative burden for both employees and plan sponsors.
Market Adoption Theory
Market adoption theory, as seen through the Technology Adoption Lifecycle, describes how technology innovations are adopted by different segments of the market over time. The lifecycle is typically divided into five stages:
- Innovators: The first group to adopt new technology, often driven by a desire to be at the cutting edge
- Early Adopters: Visionaries who see the potential of innovation and are willing to take calculated risks
- Early Majority: Pragmatists who adopt a technology once its benefits have been proven and it becomes more mainstream
- Late Majority: Skeptics who adopt the technology only after it has become the standard
- Laggards: The last group to adopt, often resistant to change and only doing so when absolutely necessary
Applying this tried-and-true theory to auto portability, we can clearly see how auto portability’s adoption is progressing and why it is now entering a new phase of rapid acceleration.
Innovators and Early Adopters
The journey of auto portability to widespread adoption has firmly established itself in this phase, as evidenced by the early December 2024 announcement by the Portability Services Network (PSN) that more than 15,000 plans representing approximately 5 million participants have already signed up for the feature. These forward-thinking plan sponsors have recognized the potential of this solution to address cashout leakage and clearly understand that auto portability will not only improve retirement outcomes for their participants, but also reduce the administrative costs associated with managing small, inactive accounts.
Further bolstering confidence, the initial operational phase of PSN, led by six large DC recordkeepers has provided proof that auto portability will work at scale, and well-publicized legislative and regulatory support has delivered clarity, while minimizing any perceived fiduciary risks.
Moving to the Early Majority
As with any innovation, the transition from early adopters to the early majority is critical, and I would argue that the adoption of auto portability has already reached this phase. Sometimes referred to as “crossing the chasm,” this phase is where auto portability will gain much broader acceptance and begin to move toward mainstream adoption.
For auto portability, several factors will drive this transition:
- Proven Benefits: Success stories from early adopters will demonstrate the tangible benefits of auto portability. Plan sponsors will see reductions in cashout leakage, improved participant outcomes, and lower administrative costs. These success stories will help to build confidence among the early majority.
- Expanded Industry Collaboration: The retirement industry will continue to come together to support auto portability, with more DC recordkeepers participating in PSN, creating an even more robust ecosystem. This collaboration will make it easy for all plan sponsors to implement auto portability, as the necessary infrastructure and support become ubiquitous.
- Participant Demand: Authoritative surveys have already indicated that 9 out of 10 participants want auto portability. As participants become more aware of the benefits of auto portability, they may begin to demand it from their employers. This bottom-up pressure could encourage plan sponsors to embrace the solution, as they seek to meet the needs and expectations of their workforce.
The Role of Market Forces
Market adoption theory also highlights the role of market forces in driving adoption.
With auto portability, I believe there are at least three key market forces at work:
- Competitive Pressure: As more DC recordkeepers embrace auto portability and more plan sponsors adopt, others will feel mounting pressure to follow suit to remain competitive. In my view, DC recordkeepers are realizing that offering their plan sponsor clients auto portability will become a key differentiator in attracting and retaining their business.
- Network Effects: The value of auto portability increases as more recordkeepers, plan sponsors and participants join the network. This creates a positive feedback loop, where more industry players adopt auto portability, thereby increasing the value for everyone involved. This network effect is a powerful driver of adoption, as it creates a self-reinforcing cycle of growth
- Ongoing Innovation: New and innovative use cases for auto portability could emerge and play an important role, as the feature could eventually be integrated with other retirement plan technologies, as 2024 Vanguard researchsuggests. It also stands to reason that an expanded network designed to locate active participants could play a useful role in the location of missing participants.
The Path to Mainstream Adoption
As auto portability continues to move into the early majority adoption phase, it is firmly on the path to becoming a mainstream feature in retirement plans. The combination of proven benefits, regulatory support, industry collaboration, and market forces are creating a perfect storm for accelerated adoption.
There’s no doubt that the adoption of auto portability is accelerating, and as plan sponsors increasingly recognize its value, the widespread adoption of auto portability will play a critical role in preserving retirement savings and improving outcomes for millions of Americans.
SEE ALSO:
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