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.
By dramatically reducing cash outs and improving retirement readiness, auto portability will deliver broad benefits to America’s defined contribution system, its participants and to the entire American economy.
But who benefits from auto portability, and how?
America’s Mobile Workforce
The ultimate beneficiary of auto portability is America’s mobile workforce–the qualified plan participants whose savings are preserved.
Two recent research models have projected sizable benefits to participants:
- The Auto Portability Simulation (APS), a discrete event simulation developed in 2016 by Retirement Clearinghouse in conjunction with Ricki Ingalls of Texas State University, and supported by the latest Employee Benefit Research Institute’s (EBRI) job-changing statistics.
The Auto Portability Simulation indicates that a program of savings portability, when applied to balances below $5,000, will preserve $156 billion in retirement savings for 81 million participants through the year 2040. When auto portability is applied to balances greater than $10,000 and $15,000, the savings grow to $218 billion and $338 billion, respectively.
The APS benefit projections are conservative, reflecting 2016 dollars only, with no investment growth assumptions.
- In 2017, EBRI delivered important research that further clarified the benefits of auto portability.
Using sophisticated modeling tools, EBRI identified the present value of auto portability under various time-frames and balance assumptions. When applied to small balances, EBRI projected benefits as high as $1.5 trillion. When applied to all balances, EBRI projected benefits of almost $2 trillion.
Specific Demographic Segments
The smaller-balance retirement savers in our mobile workforce who are most likely to cash out their retirement savings are over-represented by specific demographic segments.
The demographic segments that will benefit disproportionately from auto portability include:
- Younger age cohorts, but particularly the 20-29 age segment, where 44 percent of all participants presently cash out.
- Lower income segments, including the three lowest income segments below $50,000, where cash out rates range from 36 percent to 50 percent.
- Women, who are from 19 percent to 38 percent more likely to cash out a small balance than men.
- African-Americans, who are 62 percent more-likely to cash out over time (all incomes) and 134% more-likely to cash out with incomes below $20,000.
Hundreds of thousands of qualified retirement plan sponsors will realize benefits from Auto Portability.
These benefits include:
- Increased plan assets, which typically result in lower plan fees
- Fewer small-balance accounts, which represent an administrative burden associated with high levels of missing participants and uncashed distribution checks
- Improved retirement readiness plan metrics
- Enhanced ability to offer in-plan retirement income solutions, when participant balances are consolidated
Plan sponsors in specific segments of the economy with high labor turnover (ex. – Retail) will benefit even more. By addressing their chronic small account problem, Auto Portability will pave the way for these industries to adopt auto enrollment, which has been clearly demonstrated to increase overall plan participation, but particularly among minorities.
Retirement services providers who participate in the defined contribution ecosystem have business models based upon ever-growing levels of participants, retirement assets, or both, including:
- Record keepers
- Asset managers
As the adoption of auto portability dramatically improves the health, size and scope of the defined contribution system, these providers should realize a considerable economic benefit.
The American Economy
Lastly, our entire economy benefits when Americans can afford a secure and timely retirement. By strengthening the defined contribution leg of America’s “three-legged stool,” all sectors of our economy benefit, including the private sector, the taxpaying public and all levels of government.
Based on the far-reaching benefits of auto portability, it’s no surprise that it’s become a leading public policy initiative.
Neal Ringquist is executive vice president of sales and marketing for Retirement Clearinghouse. Retirement Clearinghouse provides services that enable unbiased collaboration between retirement plan sponsors, participants, record-keepers, service providers and regulators to facilitate portability and promote consolidation, which create better outcomes for all stakeholders.