On July 11th, 2017, a small group of retirement services professionals at Retirement Clearinghouse (RCH) successfully conducted the first-use of a new and important financial technology. Known as “locate & match” -- the technology represents a breakthrough in the ability to automatically move small balances forward in America’s defined contribution system, and forms the backbone of RCH Auto Portability.
For the first time, auto portability is now live in America’s defined contribution system.
Conducted for the benefit of a “mega” plan sponsor’s 401(k) plan participants, the locate & match process utilized a proprietary records-matching algorithm, sorting through hundreds of thousands of records, identifying over 2,800 “matches” between small-balance, safe harbor IRA accounts residing at RCH, with the accounts of active participants in the mega plan.
Each of the matched participants were then notified of the opportunity to consolidate their retirement savings into their active 401(k) plan. With just one call to the RCH Service Center or visit to the RCH1.com website, eligible plan participants began initiating automated transactions that resulted in seamless roll-in contributions to their 401(k) plan accounts.
Importance of the new process
As an integral part of RCH Auto Portability, the locate & match technology is a game-changer, because it facilitates retirement savings auto portability within the defined contribution system. Portability has long been proven to stem cashout leakage and to preserve retirement savings, but has not been an easy option for participants to undertake themselves.
This is particularly true for small-balance participants. Each year, 5.3 million job-changing participants will depart their employers with less than $5,000 in their account, and will often have these balances forced out of their 401(k) plan without their consent and into a “landfill” of safe harbor IRAs. Here, their retirement savings languish, eroded by fees and typically invested in a money market fund. Eventually, 75% of these safe harbor IRA accountholders will simply cash out.
The events of July 11th have fundamentally changed this dynamic, heralding the replacement of the landfill model by auto portability, which will effectively recycle these balances back into the defined contribution system. The Auto Portability Simulation (APS) demonstrates that, over a generation of savers, 91 million small-balance participants with less than $5,000 will preserve their retirement savings instead of cashing out.
For plan sponsors, operationalizing auto portability means a systemized approach is finally at hand to reduce the costs and administrative hassles associated with missing participants, to minimize uncashed distribution checks and to reverse the proliferation of small accounts that has clogged the DC system since the advent of automatic enrollment.
An Overnight Success, Five Years in the Making
The first-time application of RCH Auto Portability went off without a hitch, but it didn’t happen overnight.
RCH has been working for over 5 years to conceptualize, design and deliver the components of RCH Auto Portability, investing considerable time, money and resources in its operational and technology infrastructure. The result is a proprietary technology that delivers the efficiency, scale and security required to handle the large volume of small-balance job-changers in America’s defined contribution system.
Importantly, RCH Auto Portability has been designed to be very easy for recordkeepers (and by extension, their plan sponsor clients) to adopt.
What’s Next for Auto Portability?
Now fully-operational, the locate & match process will routinely execute each month, looking for more opportunities for participants to consolidate their retirement savings into the sponsor’s 401(k) plan. As matches are found, plan participants will be notified, and the automated process will ensure that their safe harbor IRA account balances are properly consolidated into their 401(k) plan accounts. These participants will save time, money and will be less-likely to cash out their retirement savings, moving forward.
In the coming year, with support from pending Department of Labor guidance, RCH Auto Portability could be further streamlined to automatically consolidate the savings of those participants not choosing to opt out of the program. There is strong bipartisan support from Congress for the DOL to offer guidance on auto portability , as evidenced by letters to the Secretary of Labor by Democrats in November 2015, and now, by Republicans in July 2017. Encouragement for DOL guidance has also been provided by the American Retirement Association, American Benefits Council, Financial Services Roundtable, Investment Company Institute, SIFMA and the U.S. Chamber of Commerce.
Over time, a much-needed network will ultimately connect all defined contribution plans through their recordkeepers to enable low-cost transfer between employers as participants change jobs throughout their working careers.
Over a generation of retirement savers, EBRI estimates the potential for retained retirement savings of $1.5 trillion (current dollars), just for balances less than $5,000, as a result of the impact of auto portability on cash out leakage.
With RCH Auto Portability live, other public policy initiatives that expand access to defined contribution plans (ex. – mandated auto enrollment, universal DC, etc.) will not be subject to rampant cashout leakage, and the prospects of a comfortable retirement for millions of Americans will be dramatically improved.