Gizem Vural

Defined contribution plans’ leakage, especially among participants with smaller balances, has been widely documented. Automatic portability, which Charlotte, North Carolina-based fintech company Retirement Clearinghouse defines as “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,” has been promoted since 2014 as a potential solution to leakage.

The auto-portability movement has gained momentum recently, culminating in the 2022 formation of the Portability Services Network, owned jointly by RCH and several of the largest U.S. recordkeepers. Spencer Williams, president and CEO of both RCH and the PSN, says the PSN is meant to serve as a utility for the retirement industry. PSN “is not an entity that is seeking profit for itself,” he explains. “We seek to deliver auto-portability to retirement plan participants at the lowest possible cost.”

RCH provides the PSN with the people and the technology necessary to deliver auto-portability to the market, Williams explains. Participating recordkeepers bring their plan sponsors to the arrangement, and those sponsors bring the participants. Neal Ringquist, RCH’s chief revenue officer,  notes that PSN reaches 63% of the defined contribution marketplace, based on the six original PSN owner/members (Alight, Vanguard, Fidelity, TIAA, Empower and Principal).

Coordination Required

Auto-portability sounds simple enough. Plan participants change jobs; PSN tracks them to their new employer and verifies their identities; employees consent to a balance transfer; and the funds from their previous plan are added to their new plan’s balance.

From an operational and legal perspective, auto-portability “wraps around” a mandatory distribution provision, says Ringquist: “In order to do auto-portability on a negative consent basis, you have to both force small balances out of a plan on a negative consent basis, as well as roll those balances into a plan on a negative consent basis.”

These transfers require coordination among recordkeepers and sponsors, plus extensive data processing. Participating recordkeepers must be both sending and receiving recordkeepers. That means a recordkeeper and its plan sponsor-clients agree that terminated participants who are eligible for auto-portability because they meet the mandatory distribution provisions will be forced out of the plan and their data included in PSN’s systemwide queries. Also, each recordkeeper and plan sponsor must also accept roll-ins of new hires’ transferred balances to their plans.

Transfers require reciprocity between force-outs and roll-ins at the sponsor level. For instance, a plan might currently retain departing employees’ account balances greater than $1,000 and cash out accounts with less than $1,000. Plans are permitted to involuntarily distribute terminated vested accounts less than $5,000.  If the sponsor wants to include an auto-portability feature to eliminate issuing multiple small checks and the uncashed check problem, it will be able to accept negative consent roll-ins only at less than $1,000.

Ringquist explains that every roll-in comes through an RCH IRA, either a safe harbor IRA or a conduit IRA. While more than 95% of plans allow roll-ins from other plans, only about two-thirds allow roll-ins from IRAs, he notes, citing Plan Sponsor Council of America data. Plans that do not currently allow roll-ins from IRAs and want auto-portability will need to modify their plan documents to accept IRA roll-ins. Plan sponsors will not have any technology build-outs to adopt auto-portability, but they will need to add a data-sharing provision to their recordkeeper contracts.

Moving Data

From a high-level perspective, RCH describes auto-portability as “an electronic records matching technology that is used to locate and match participant accounts across record-keeping platforms.” A set of 14 application programming interfaces, known as APIs, are an essential part of automating the locate-and-match technology. These APIs allow recordkeepers and PSN to automatically exchange the data required to search for participants who left their previous plan and subsequently enrolled in a new plan (assuming both plans are with a PSN recordkeeper).

The APIs are also used to enter requests to bring additional companies and plans into the network; to share eligible accounts; to locate and match active accounts; to request and share account details when a participant is located as active in a new plan; to inform of a known bad address or opt-out elections; and to initiate and confirm rollovers into a new plan, according to Steve Holman, head of Vanguard’s Distribution Enablement Group.

The process starts when a participant qualifies to be forced out of his or her previous plan. At that time, the plan’s recordkeeper automatically sends the participant’s Social Security number and account number to PSN. It then replaces the account number with a randomly generated number in a new data set, says Ringquist. PSN then uses its Locate API and sends that data set to its member recordkeepers, who query their databases of plans signed up for auto-portability, seeking the participant’s Social Security number at the new plan.

When an individual is located by Social Security number, the recordkeeper uses the PSN Match API and sends PSN a data set in which they drop the participant’s Social Security number and add certain demographic data to the previously generated random number. PSN goes back to the sending recordkeeper and asks for the same data set. PSN runs the two data sets through a match algorithm to verify the individual’s identity; the entire process is completed by API calls. “To the extent that that account detail is matched above a particular score, that starts the consent process, and PSN sends consent notifications to the individual as we’re operating right now under Department of Labor guidance,” says Ringquist.

Implementation timeline for recordkeepers

The recordkeepers that recently joined PSN have distinct timeframes for introducing auto-portability to their plan sponsors. Ringquist says the implementation consists of three steps.

First, the recordkeeper defines its business requirements for auto-portability. The second step consists of building the APIs. The final step is to test the process. Testing is extensive, because queries can involve millions of records being queried across the recordkeeper’s book of business, Ringquest emphasizes: “I’d say this is a six-month effort when you look at those three phases to get something like this completed from a recordkeeper’s perspective.”

Holman says Vanguard plans to go live with auto-portability on October 1. So far, sponsors’ initial reactions have been universally positive, he says. “They see the value to the participants, and they see the ease of joining the network,” Holman explains. [But] “we’ve only been able to share with them in concept, so they want to see the legal contract that they’re signing to join. We’ll be ready to share that information with the plan sponsors very shortly.”