Alight Solutions is spearheading the launch of the Retirement Clearinghouse Auto Portability program.
Alight will offer the automatic portability solution to its client base of 185 defined contribution (DC) plan sponsors serving nearly 5 million employees at the end of this year. “I hope other recordkeepers will quickly follow Alight’s lead. Workers changing jobs often find cashing out to be the easiest option, and cash-out leakage is a critical reason that we have a nationwide retirement savings shortfall,” says Robert L. Johnson, founder and chairman of The RLJ Companies and majority owner of Retirement Clearinghouse (RCH).
The RCH Auto Portability service, which automates the consolidation process for small accounts, has been in operation on a pilot basis since 2017. On behalf of a large plan sponsor in the health services sector, RCH completed the first-ever fully automated, end-to-end transfer of retirement savings from a safe harbor individual retirement account (IRA) into a worker’s active account in July 2017. Since that time, more than 1,600 workers have consented to have their former-employer plan accounts transferred into their current employer’s plan.
Spencer Williams, founder, president and CEO of Retirement Clearinghouse, previously explained to PLANSPONSOR that when a small account balance—less than $5,000—is automatically rolled into a safe harbor IRA, there is an electronic record of who that person is and all the demographic information associated with that account. “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,” he said.
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 U.S. Department of Labor (DOL) issued regulatory guidance in July 2019 and November 2018 that cleared the way for plan sponsors and recordkeepers to adopt the technology enabling auto-portability. In its 2018 guidance, the agency said plan sponsors have a fiduciary responsibility for selecting and monitoring Retirement Clearinghouse’s Auto Portability Solution, but once assets have been transferred from a plan sponsor’s retirement plan, it is no longer a fiduciary with respect to those assets. In 2019, the DOL issued its final prohibited transaction exemption (PTE) for automatic portability. It removed the requirement that participants consent to have their small balance of $5,000 or less in a safe harbor IRA automatically rolled into their new employer’s retirement plan.
In an analysis of legislative proposals, the Employee Benefit Research Institute (EBRI) provided stats that showed auto-portability would decrease retirement savings shortfalls for all age cohorts or plan participants. According to EBRI, each year, approximately 40% of terminated participants elect to prematurely cash out 15% of plan assets. For 2015, EBRI estimated that $92.4 billion was lost due to leakages from cash-outs.
Considering auto-portability as a standalone policy initiative, EBRI projected the present value of additional accumulations over 40 years resulting from “partial” auto-portability (small balance cash-outs of participant balances less than $5,000 adjusted for inflation) would be $1.5 trillion, and the value would be nearly $2 trillion under “full” auto-portability (all terminated participant balances regardless of asset level).
Results from Retirement Clearinghouse’s product use by one plan sponsor showed that, upon consolidation, workers’ median plan account balance increased by 46% and the combined future value of their preserved savings was more than $3 million at normal retirement age.
“Our vision is to dramatically reduce both premature cash-outs and savings depletion from fees charged to stranded, small-balance IRAs by providing an automated method for consolidating workers’ retirement accounts as they change jobs. These goals will be accomplished through the construction of a nationwide, electronic network that connects all employer-sponsored plans,” Williams says. “We are pleased that Alight shares that vision, and has stepped up to the plate to turn it into a reality for its clients. From this point forward, each recordkeeper that implements the technology powering auto-portability will expand the network until it reaches its full potential.”