Consolidation Corner

I’m convinced that Auto IRA programs, despite their potential size and strength, suffer from an obvious Achilles’ heel: a lack of retirement savings portability.  

Without addressing their portability problem, Auto IRA programs could expand, but may never reach their full potential, housing large numbers of churning, small-balance accounts. However, with adequate support for portability both into and out of these programs, they could dramatically increase the odds that they deliver on their promise of building incremental retirement wealth for millions of Americans.

An interesting and valuable finding lies buried within EBRI’s 2022 Retirement Confidence Survey (RCS), but you won’t find it referenced in the organization’s initial report, officially released to the public on Thursday, April 28^th.

In an excerpt of a report available to survey partners, the RCS found that a plurality of job-changing 401(k) plan participants favored automatic plan-to-plan portability over consolidating their savings to an IRA, or leaving their savings behind in their former employer’s plan. This result comes on the heels of EBRI’s 2021 survey, which found that nearly 9 in 10 participants believed that auto portability would be valuable to them.

In general, legislation that gets more Americans saving for retirement is good. But if a great many of those incremental savers would likely cash out their savings immediately following a job change, then the public policy benefits might fall a bit short, no?

Last year marked the 15^th anniversary of the Pension Protection Act of 2006. This legislation included well-intentioned provisions for helping Americans increase their retirement savings, including the capability for defined contribution plan sponsors to automatically enroll employees in their plans. Despite the good intentions behind auto enrollment, and all the positive outcomes that have resulted, its introduction also coincided with high workforce mobility and a lack of seamless plan-to-plan savings portability, which has led to a surge in small, stranded 401(k) savings accounts.

A 03/29/22 hearing by the U.S. Senate Committee on Health, Education, Labor & Pensions (HELP), Rise and Shine: Improving Retirement and Enhancing Savings, focused on solutions that would enhance retirement security for Americans, particularly those who are under-served and under-saved.
 

For quite a while, a compelling case has been made for auto portability based on its positive impact upon America’s 401(k) system, including participants, plan sponsors, recordkeepers and asset managers – all of whom realize significant, quantifiable benefits when small-balance retirement savings are preserved within the 401(k) system.

With $10 trillion in 401(k) and other defined contribution retirement assets to safeguard, retirement industry regulators are intensely focused on the issue of cybersecurity.

The latest developments signifying regulatory resolve include enforcement actions by the Securities and Exchange Commission (SEC), who in August 2021 sanctioned 8 firms in three separate actions (links here, here and here), for failing to have cybersecurity policies and procedures in place, potentially leading to compromised private client data. 

“America’s retirement system is sustainable” said no one, ever.

That’s the basis for my somewhat cynical reaction to a February 14^th, 2022, Request for Information (RFI) issued by the DOL’s Employee Benefits Security Administration (EBSA). The RFI (Request for Information on Possible Agency Actions to Protect Life Savings and Pensions from Threats of Climate-Related Financial Risk) was issued pursuant to a May 20^th, 2021 Executive Order, and asks respondents to identify climate change related threats to “the life savings and pensions of U.S. workers and families.”

I’m old enough to remember a time when auto portability was a concept, scarcely worthy of serious attention by practically anyone except a few zealots with an idea.

For years, regulators, policymakers and, of course, 401(k) plan sponsors have struggled with the vexing problems of missing participants, uncashed distribution checks and small, forgotten accounts. Every year, sponsors beseech regulators for clear guidance to mitigate their fiduciary risk, while lawmakers propose policies such as lost and found registries to help deal with the problems. Yet, the problems persist and have grown worse over time, even accelerating recently due to The Great Resignation.