Portability on Steroids: Let’s See It!

J. Spencer Williams, Founder and CEO, Retirement Clearinghouse

Prior to joining Retirement Clearinghouse, Williams served in a number of senior executive roles at MassMutual Financial Group, and as a Retirement Services executive at Federated Investors, Inc. Williams earned his B.A. degree in English from the United States Naval Academy and an M.B.A. from the University of Pittsburgh. Was it the naval influence that drove him to cross at least one state border for a haircut during the pandemic? Our conversation was far reaching, and sometimes detailed. We share it in two parts.

PART ONE:

Spencer Williams, it is really terrific to talk to you today. You and your company are pioneers in the auto portability space. What is “auto portability” and why do we care about it?

So, what is auto portability? I'm going to start high, and go low. At the highest level auto portability is the first tangible fulfillment of a feature, or benefit, that was baked into ERISA when the law was passed in 1974. ERISA promised portability to participants in defined contribution and defined benefit plans.

Of course, we don't even think about defined benefit plans anymore, do we? But in defined contribution plans, portability is the function that needs to occur when a very common event happens in our workforce: someone changes jobs. You've changed jobs, I've changed jobs. Everybody changes jobs.

That’s indisputable.

You know, if you look at Employee Benefit Research Institute statistics, they say the average worker will have about seven-and-a-half jobs during their entire career.

What's the impact of that? It’s important to understand that job-changing is the dynamic that drives the need for auto portability. We call this dynamic the mobile workforce. Let’s say someone works for an employer, they have a defined contribution plan, and they do all the right things to save. They payroll deduct, then they catch that match, their account is growing, and then they change jobs.

This is where the system breaks down. This is where the promise of ERISA doesn't happen. Because at this point keeping your savings with you as you change jobs becomes a DIY event—Do It Yourself.

As it turns out, DIY is terribly cumbersome. And frankly, the process intimidates most people. For those who aren't intimidated, it's just not the thing where anybody gets up in the morning, and says, “you know what? Today I'm going to go get my money from my former employer’s plan. And today I'm going to move it to my new employer where, by the way, I'm doing the right things again. I'm in the plan, payroll deducting, catching the match, saving money. The problem is I left some behind.”

Now do that seven-and-a-half times in your career.

Yes. And you can see you have kind of a retirement planning mess.

Let's now turn to auto portability, and answer your question. Auto portability is a fully automated system. It’s a systematic way for that account with a former employer to follow me to my new employer on an automated basis.

Think about it this way. For those of us of a certain age, if we wanted to have cash we would go into a bank, fill out a withdrawal slip, walk up to the teller's window and we would ask for bills. In my case, they were always small bills. Be that as it may, along came the ATM. Hardly anybody goes into a bank branch for that service anymore, because I can go to an ATM and get money. And of course, I don’t really want cash because now we have electronic payments. So I don’t even go to the ATM very often.

Think about how our world operates differently than it did even 10 years ago, much less 50 years ago, which is the anniversary we're coming up on with ERISA. And yet, if I want to move my retirement money it’s still much harder even than going to the bank to get cash in the 1970s.

We know this affects everybody—who gets it the worst?

Today, auto portability is designed for a very specific market segment. That market segment is the smallest of the small.

Most of your readers will recognize something called variously “mandatory distributions”, “automatic rollovers”, or “de minimis force-outs” from employer plans. All of those terms mean the same thing. By legislation if you have less than $5,000 in your retirement account at the time you terminate employment, your employer has the right to force you out of the plan, and to do so with a distribution.

There are lots of good reasons for that. Lots of small accounts get generated when people are working for an employer for a relatively short period, and they become a nuisance for employers. They can be expensive for the plan, there’s recordkeeping for someone who no longer works for you, all those types of things. But it's not such a great deal for the participating former employees.

Because for those workers, what's evolved is lots of cash-outs. Participants, particularly small-balance participants, took the money and ran. They spent their savings and put a dent in their retirement security. Auto portability is designed for that segment, and is a very simple mechanism.

This seems important.

We at Retirement Clearinghouse saw the cash-out problems, saw the mobile workforce problems, saw the tremendous loss of savings. Estimates published by the Savings Preservation Working Group indicate that about $92 billion a year in retirement savings are being cashed out by terminated participants when the change jobs.

It is also been observed that if we were to adopt the principles that underlie one of the great successes of the defined contribution system, automatic enrollment, and apply them to the mobile workforce we could reverse that problem and retain that money in the system.

Particularly for these smaller accounts where people are often just getting started on their retirement savings.

So Retirement Clearinghouse approached the Department of Labor for legal guidance and ultimately they  said, “you can do this.” The Department built lots of consumer protections in, and the end result is that on a negative consent basis, we can help that individual's money follow them from employer to employer.

Auto portability. No cash-out. Retirement savings retained.

Yes—and what is the principle that we're adopting from automatic enrollment? It is simply the concept of negative consent. You change an individual's outcomes by changing the default. Today the default is that if you don't do something, a DIY movement of your money, it's going to get cashed out or stuck in a safe-harbor IRA earning money market rates, which are essentially zero. And then it gets stranded, lost and nothing good happens from that. Or you cash it out.

Both of those are just terrible outcomes.

We changed that default to “Don't do anything. We will find your new employer’s plan for you, and when we do, we're going to give you a chance to opt out of consolidation.” But if you don't do anything we'll take care of the automated movement of the money to your new employer’s plan. You can also proactively instruct us to move the money somewhere else if you prefer, and we will. It's a whole change in thinking around the wildly underserved small balance segment of the market.

Take a moment to tell us about the mechanics of how this works.

What we do has three parts to it. First, we use a technology we call “locate and match.” We query all the plans that are participating in the auto portability system, or network. We say, “we have an employee who we know is terminated from this plan, or who is in this safe-harbor IRA. Do you have an active account for this person in your plan?”

If we have a successful locate, we then undertake to match the individual. We make sure we have the right match. My name is John (Spencer) Williams. So let's make sure we have the right John Williams, because there's a bunch of us. We have algorithms that do that technologically, and lots of safeguards.

So you found us.

Now we have a located match, the second part is a consent process. The Department of Labor, I think correctly and with consumer protections in mind says: “let's provide a regimen of notices to that individual. When you have a match, notify them.”

Now this is what's really interesting. Lots of people stop here and they say, “wait a minute, this is this dinky little account.” We say “no, think through to the end.” We just matched them in their current employer’s plan. We now have a good address. Because it's your current employer. We can notify you and give you a window to consent.

And then if you don't respond, we provide you with a second notice that says, “No, we really mean it. We're going to move this to your new employer plan if you don't do something.” And then after that we undertake the transition, following the opinion from the Department of Labor that says, “you can do this by negative consent. And we take a third step in the process. Which is the automated money movement.”

So easy for the employee.

The network itself is in the process of being built. We have our first large recordkeeper—Alight Solutions. Alight is the former Hewitt Associates, for all of us who've been around for a while. Their plan clients are Fortune 500 companies.

We're happy to report that we're seeing a great deal of success and adoption within that client base.

Think of Alight Solutions as a node on the network. When you connect Retirement Clearinghouse to that node, you get access to the participants in all of their client plans.

So think of the network of recordkeepers as nodes on the network. As people change jobs—we've done some deep research on this—within one year, two out of every three people in retirement plans that change jobs will arrive at a new employer that has a 401(k) plan. Within one year. If you extend that out over a three-year period, you're going to see closer to 85 out of every 100 people that changed jobs go to a new employer where there's a plan. You create the network through the recordkeepers, which then creates the real network between all the employers. And that's how we're building this up.

You’re working very hard. What's the cost of that automated activity to the participant and the employer?

Let’s start here: there is no cost to an employer. Zero. Now, an employer has to adopt a short form agreement. They have to amend their plan to allow this service. They have to perform their customary fiduciary duties, which is due diligence on us. That's largely done through their recordkeeper. But no cost to the employer for the service.

For the employee, there's a sliding scale. The maximum amount is $59 as a one-time fee, which is only charged when we make a successful match and get your money to your new plan. Once you're in the network we will search forever until we find your new employer plan. If you decide to opt out at any time, you're done, there's no fee.

Now, I mentioned it was a sliding scale, and this is important. As the account size decreases, the fee decreases. We're talking about small accounts. For example, a $200 account would incur a $20 fee. And last but not least—and this was simply a business decision—all accounts with less than $50 just go through the system for free. No charge to the employee to consolidate.

We worked extensively with both recordkeepers and employers to create a best fit approach. And we take it one step further. When the network gets up to a certain volume, participants will get a 20% fee reduction to everything I just said.

We'll say Spencer, there are a lot of things we would pay $59 for. Not having to do paperwork is very high on that list.

Well, you make a good point. Just for fun I'll cite some research we did with Boston Research Technologies CEO Warren Cormier several years ago. We surveyed this very point with a group of participants that had completed a transfer from an old plan to a new plan. And the average amount of time they spent on it was nine hours. So that roughs out to six bucks an hour, something like that.

This sounds like a good investment.

It gets better. We had people estimate what they would pay to have someone take care of it for them. We had people say they would pay thousands of dollars.

We think we know some of those people.

FOR PART TWO OF THIS CONVERSATION, CLICK HERE

Thank you very much, Spencer Williams! Colleagues, If you’d like to connect directly with Spencer, you can reach him by email here; you’ll see his work bio here. You can follow Spencer’s work adventures on Twitter: @RCHJSpencerW, and connect on LinkedIn here. And you can follow and engage with Retirement Clearinghouse on Twitter @RCHConsolidate, on LinkedIn, and online.

This piece was featured in April 8, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.