Products September 20, 2023

A ‘Slam Dunk’: 401(k) Auto-Portability Network Nears Live Date

A program starts in October giving plan sponsors the option for terminated small plans to automatically port to active 401(k)s if within a network of recordkeepers.

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On October 1, a network of the country’s largest recordkeepers will begin offering plan sponsors the ability to automatically move small, unclaimed participant accounts to active 401(k) plans, so long as they are within the group of providers.

It’s a moment the Portability Services Network LLC, the brainchild of Retirement Clearinghouse LLC, has been working toward for about 10 years.

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“There’s a small measure of satisfaction in that regard,” CEO Spencer Williams says, speaking a few weeks before launch. “We kind of took the long road, the hard road, and have arrived at a spot that is, frankly, not only the best solution, but has promise of being even better.”

The October start, while a major milestone for the network, is still staggered, according to Williams and Neal Ringquist, Retirement Clearinghouse’s executive vice president and chief revenue officer.

At the start, only Alight and the Vanguard Group will go live with automatic portability on a “negative consent” basis. Those recordkeepers have some plan sponsors teed up to go live with the service, says Ringquist. Meanwhile, Fidelity Investments will follow before the end of the year, and the three other recordkeepers—Empower, TIAA and Principal Financial Group—will join in 2024, a group that Retirement Clearinghouse earmarks at 63% of workplace plan participants.

Much of the success of the program will depend on recordkeepers and retirement plan advisers getting plan sponsors to sign up, according to the executives.

“Each organization has its own go-to-market strategy,” Ringquist says, noting that some recordkeepers operate more directly to consumers, while others work more through retirement plan advisers. “I expect we’ll revisit [the outreach strategy] in 2024 based on some results of the initial plans that have gone live.”

Long Road

The Portability Services Network has been working with some of its large plan sponsor clients since 2017 on “affirmative consent” from participants who are going to have small cash balances pushed out of plan. More than 3,000 participants have given consent and had balances ported first to an individual retirement account, and then to an active retirement plan, Ringquist says.

In 2019, Department of Labor guidance made it possible for funds to be moved from one employer plan to another plan automatically. At that point, the Retirement Clearinghouse started approaching recordkeepers to sign on. Alight signed up first, followed by Vanguard.

When Fidelity signed up in 2021, Retirement Clearinghouse hit pause on the program to regroup. The parties involved started the Portability Services Network, later adding the additional recordkeepers.

Going forward, Ringquist and his team will continue to add recordkeepers as “members,” not full-fledged partners, though those providers who join will sign the same operating agreements as the original six, he notes. “We’re working on bringing some others aboard and hope to have, by year-end 2024, 80% of the market, as measured by participant market share,” he says.

Williams says there is a strong policy argument for recordkeepers to participate. He notes that the program can help combat a 401(k) cash-out problem that, demographically, tends to hit low-income earners, minorities and women on a disproportionate basis. He also notes the business element of keeping people actively invested in the workplace retirement plan system.

“Auto-portability incubates accounts,” Williams says. “It not only helps keep money in the system, but it helps smaller accounts become larger accounts.”

The Business Case

The Portability Services Network has competitors who also want to gather small, forgotten accounts and transfer them either into employer-sponsored retirement plans, or individual retirement accounts.

Millennium Trust Company LLC, soon to be Inspira Financial, offers auto-portability defaults into IRAs, and the funds can then be moved into an existing employer-sponsored retirement plan. According to the firm, client testing for the program is underway, with full launch expected in 2024. Millennium currently has more than 3 million participants eligible for the program.

A financial technology firm, Beagle Invest LLC, comes at the problem from the participant side. It offers a “hassle-free” service by which a workplace saver can pay to have the company identify any outstanding accounts and roll them into an IRA.

Finally, in the SECURE 2.0 Act of 2022, Congress directed the DOL and the Department of the Treasury to create a “lost-and-found” database for participants to find their employer-sponsored accounts.

Williams believes the Portability Services Network is best positioned to help the retirement leakage problem through its private network combined with policy support. He points to the fact that the DOL named Retirement Clearinghouse as a fiduciary in the auto-portability program. It’s a position the president says the firm is comfortable with, as there is “no situation where a terminated account is worse off than sitting in its new employer plans. … It was a slam dunk business case.”

Ringquist notes that, when competing for these lost accounts, the business case also stands up to keep funds within the network of recordkeepers as opposed to having them rolled into IRAs. He says that the cash leakage balances the network is looking to transport are relatively small; 75% are around $5,000.

“These balances are just not even in the crosshairs of many advisers,” he says. “What we’re simply doing is retaining that … so it’s a net win-win for the advisers, and that’s the important thing that we are trying to explain to them.”

Compliance September 20, 2023

Funds’ Portfolios Must Reflect Their Name, SEC Says

New rule means funds will have to derive 80% of their value from investments related to their official names.

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The Securities and Exchange Commission finalized a new rule Wednesday which will require investment funds whose name suggests investments with “particular characteristics,” ranging from environmental, social and governance to artificial intelligence, to have at least 80% of their value in securities that correspond to that name.

Before the new rule, the only funds required to follow an 80% rule were those whose name evoked a “specific type of security,” such as ‘equity’ or ‘bonds,’ “and not a strategy,” such as ‘growth’ or ‘value,’ says Abigail Hemnes, a partner in K&L Gates’ asset management and investment funds practice. Index funds were likewise already subject to an 80% rule.

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Fund names previously not subject to the names rule were subject only to the “general anti-fraud provisions of the federal securities laws,” Hemnes explains.

Besides names that evoke a strategy, any name that suggests the fund focuses on a particular geographic region, industry or goal must also follow an 80% policy, according to the SEC.

During Wednesday’s open hearing in which the rule was approved by a 4-1 vote, SEC Chairman Gary Gensler said that a fund name that includes “AI or big data” would need to have 80% of its value in securities that reasonably fit that description.

Growth vs. Value

Amanda Wagner, the senior special counsel for the SEC’s division of investment management, explained during the hearing that funds have flexibility to reasonably define the terms in their name. SEC Commissioner Hester Peirce asked Wagner if one fund classifies a security as “growth” and another fund classifies it as “value,” is one necessarily violating the names rule? Wagner answered, “Definitely not,” provided the security could plausibly fall into either category.

Peirce also asked Wagner if a fund calling itself a “green car” fund could legally invest in high-efficiency gas-fired vehicles and not electric vehicles. Wagner answered yes, because that was a reasonable interpretation of “green car,” as that phrase has no “universal definition.” The fund certainly could not call themselves an electric car fund, Wagner added, and the fund would still have to define what it meant by “green” in its prospectus and disclose which securities it was counting toward 80%.

Wagner also noted that funds with compound names can reach 80% by adding the items together. Hemnes says that this would apply to ESG labeled funds, because they could keep the label, as long as ESG values added up to 80%. The fund would still have to define each term and disclose the exact criteria used to select investments described by the terms, she notes.

ESG Considerations

The initial proposal would have made ESG integration funds all but impossible to name ‘ESG,’ because it would have banned funds that do not use ESG considerations as a primary factor from using the label in their name. The final rule rolls this back, according to Hemnes: “ESG integration funds can still use an ESG term in” their names.

Andrew Behar, the CEO of As You Sow, a non-profit that promotes corporate social responsibility, said in an emailed statement that, “Under the proposed rule, if funds considered ESG factors, but such ESG factors were not the principal purpose of the fund’s investment strategy, it would have been materially deceptive and misleading to use ESG or a similar term (such as sustainable, green, impact, etc.) in the name. This section was left out of the final rule.”

Behar says that many funds take advantage of the remaining 20% in their portfolio in ways that can be “misleading.” He specifically cited funds that use environmental goals in their names but include coal companies in their portfolio. Behar says the final rule is a step in the right direction but ultimately will not end misleading labeling, “as long as you are 80% of what you say you are.”

If a fund falls below the 80% threshold, it will have 90 days to come back into compliance. The proposal, published in May 2022, initially gave funds only 30 days.

Funds greater than $1 billion in value will have 24 months after the rule’s effective date to comply, and those smaller will have 30 months. The effective date is 60 days after the rule is entered into the Federal Register.

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