Is Auto-Portability the Next Big Thing?

Retirement Clearinghouse (RCH) hopes it newest service innovation will have as big of an impact on retirement plan participant outcomes as the introduction of auto-enrollment.

In 2007, one of RCH’s clients asked that a voluntary benefit be put in place for new hires, to help them roll their money into the plan. 

“That’s when the lightbulb went off,” says Spencer Williams, president and CEO of Retirement Clearinghouse. “Here we are in the business of taking people out of the plan—a mandatory distribution—what if we set up a system with all the recordkeepers, and instead of sticking these small balances in a safe harbor IRA [individual retirement account], what if we went looking for their new 401(k) and automatically rolled them in?”

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Some of the largest recordkeepers are currently exploring this possibility, Williams tells PLANADVISER. “They haven’t committed to moving forward, but they see exactly the same benefits, the first one being stopping the leakage.” 

By creating this “electronic highway,” he says, plan sponsors can take further advantage of participant inertia. “Over time, the mobile work force becomes accustomed to their 401(k) moving with them and they stop cashing out.” 

The Employee Benefit Research Institute (EBRI) reports that nearly 40% of 401(k)s today hold $10,000 or less, Williams says, and a large portion of that population has at least one other account. By automating this roll-in process, he believes the retirement industry could prevent the problem of disparate accounts and do a great service to participant demographics most likely to cash out a small balance.

Doing this requires a small change in thinking, Williams says. Looking at a plan, today the automatic rollover provision directs funds out of the plan environment. “If you connect the system with auto-portability, that same employer could now anticipate that some percentage of its new hires is going to arrive with a balance. So, instead of starting at zero the day they enroll, we automatically move their old account with them.” In a perfect world, he adds, “a plan would expect to receive as much as it distributes.”

How It Works

The process begins with a distribution of a small account balance—less than $5,000—from the plan, Williams explains. 

“The plan distributes that $4,000 account to a safe harbor IRA. We now have an electronic record of who that person is and all of their demographic information associated with that account,” he says. “We then take that information—and, of course, we have to follow the highest protocol for security and confidentiality—but we essentially take that person’s Social Security number and we send it to all of the recordkeepers that are participating in the system.”

Those recordkeepers, he continues, can then search their systems for an active 401(k) attached to that individual. This is all done electronically, and if a recordkeeper locates an account for the same person, it sends a notice back to the clearinghouse. After verifying that both parties have the correct person—by checking, for instance, the last name, date of birth and address information—if the scoring system says that it is a true match, the account is then transferred from the safe harbor IRA to the new plan sponsor. Throughout this process, the individual is sent updates and given the choice to opt out.

“The Department of Labor [DOL] is actually working on what’s called an advisory opinion, which is really providing a legal statement—not only to us, but to the plan sponsor—that says this process of negative consent is OK. We’re hopeful that the Department of Labor will issue that opinion in the near future, and then we’ve got all the bases covered,” Williams says. “That could well be a trigger for the process moving forward and being adopted on a broader basis.” 

Could Your Practice Survive Without Boomers?

There is an enormous generational transfer of wealth on the horizon that will test retirement advisory firms’ ability to attract younger clients, a new J.D. Power report finds.

J.D. Power says an aging client population and a massive generational transfer of wealth away from Baby Boomers means advisory firms not focused on winning Millennial and Gen X clients may already be already falling behind.

“Investment firms are not asking the right questions of their clients and may be at risk of losing assets if they fail to establish relationships now with the next generation,” the report warns.

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As part of the 2015 Full Service Investor Satisfaction Survey, J.D. Power researchers measured overall satisfaction with full service investment firms across seven factors:

  • investment advisor service quality;
  • investment performance;
  • account information;
  • account offerings;
  • commissions and fees;
  • website; and
  • issue resolution.

Overall investor satisfaction remains unchanged from last year’s survey, at 807 on a 1,000-point scale. Beyond rote satisfaction, the research highlights some pressing statistics. For example, the median full-service client is 61-years-old and right on the brink of retirement. And despite the 71% of investors who say they have informed their adviser about their next-generation beneficiaries and a willingness to discuss wealth inheritance strategies, only 42% of clients say their referrals were contacted by the adviser to have such a conversation.

“When advisers ask about the needs of the next generation, not only does the number of contacts with beneficiaries and potentially new clients increase, but overall satisfaction is also higher among investors who are asked than among those who are not asked, at 854 vs. 793, respectively,” the report explains.

Mike Foy, director of the wealth management practice at J.D. Power, notes that talking to clients about their beneficiaries may feel awkward to many advisers, “but most investors want their wealth to benefit the next generation.”

“Many times, investors themselves struggle in money-related conversations with their kids, and an adviser is in a unique position to be a bridge between generations,” he adds. “Firms that can effectively train and support their advisers in this regard have a real opportunity to differentiate their services.”

Other key findings show there is only a five-point gap in satisfaction between the highest-ranked investment firms and the industry average (812 vs. 807), “suggesting there is a limited perception of differentiation with the client experience among industry firms.”

“Similar to their lack of preparation for intergenerational wealth transfers, firms are also not proactively preparing for intra-generational wealth transfer events,” J.D. Power warns. “Nearly one-fourth (23%) of investors say their adviser never interacts with their spouse or partner, missing a tremendous opportunity to retain the household wealth over the long term.”

The report finds many investors have already positioned themselves to smoothly enact wealth transfers—for example, among investors who have named next-gen beneficiaries, 33% of the beneficiaries have an account or product with that same firm. The proportion of beneficiary accounts increases by a striking 24% points when advisers proactively ask their investors about beneficiary needs.

Even as advisory firms take steps to promote internal wealth transfers, the movement of wealth will almost certainly face some hiccups, as there are important generational differences in terms of the trust investors place in their advisers. Slightly more than two-thirds (67%) of pre-Boomers (born before 1946) indicate their adviser always makes recommendations in their best interest, the report finds, while just 40% of Generation Y (born 1977 to 1994) and Gen Z (born 1995 to 2004) say the same.

J.D. Power finds higher client satisfaction generally translates into significant increases in advocacy, loyalty and share of investment wallet for firms. Among firms ranking above the industry average, 48% of client investors say they “definitely will” recommend their firm, versus 37% of investors with firms ranking below average. 

With respect to loyalty, 46% of investors of firms that perform above industry average say they “definitely will not” switch firms, compared with 38% of investors with firms that perform below average. While there is only a two-point gap in share of wallet between above- and below-average firms (86% vs, 84%, respectively), this can still translate into a meaningful increase in a firm's assets under management, the report concludes.

The 2015 U.S. Full Service Investor Satisfaction Study was fielded in January and February 2015 and is based on responses from more than 5,300 investors who make some or all of their investment decisions with an investment adviser.

Additional findings, including firm-by-firm satisfaction rankings from this and other J.D. Power advisory industry research, are available here.

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