Auto enrollment, codified in law by the Pension Protection Act of 2006, was drafted with the best of intentions—to increase Americans’ retirement savings—but it has had the unintended consequence of impairing plan effectiveness. By proliferating small accounts in plans, auto enrollment has caused a decrease in average account balances throughout the U.S. retirement system. Adding to the urgency of this issue is the rising rate of auto enrollment adoption across defined contribution plans of all sizes, but particularly among larger plans.
According to Form 5500 data, defined contribution plans with auto enrollment, across all industries, have average account balances which are 7% lower than those without auto enrollment. When we look at individual industries, the impact of auto enrollment on average account balances is much more pronounced.
For example, the difference between average account balances of plans sponsored by educational service companies with and without auto enrollment is staggering—the overall average account balance for the latter is 164% higher! This trend manifests itself in varying degrees among sponsored plans in many other industries, including furniture and related product manufacturing (123%); beverage and tobacco product manufacturing (108%); securities, commercial contracts and other financial products (33%); real estate (21%) and telecommunications (21%).
Research shows that a plan’s recordkeeping and administrative fees tend to be inversely proportional to its average account balance (see previous blog post). If your plan’s average account balance is declining, you may be paying more in fees than you would if it was stable or increasing.
Portability Solutions Provide an Easy Fix
The core objective of portability is systematic account consolidation, which counterbalances the harmful side effects of auto enrollment by increasing a plan’s active participant account balances. Portability solutions reduce the many frictions associated with moving an account from one plan to the next, and have been proven to reduce leakage and the cost of maintaining multiple retirement savings accounts (see previous blog post).