Spencer Williams is the founder, president and CEO of Retirement Clearinghouse—a specialized provider of retirement savings portability and account consolidation services for America’s mobile workforce, including RCH’s singular innovation, RCH Auto Portability, specially designed to help low-income and minority workers.
Russ Alan Prince: Tell me about Retirement Clearinghouse.
Spencer Williams: We are experts in account portability between defined contribution retirement plans. Retirement Clearinghouse services help address frictions inherent in the U.S. retirement system with regard to moving 401(k) savings account balances from plan to plan at the point when a participant changes jobs. To that end, we are the inventors of the auto portability solution for the seamless, routine and automated transfer of small balances, with less than $5,000, from a terminated account in a participant’s prior employer’s plan into an active account in their current employer’s plan.
Since our founding in 2001, we have consolidated more than 312,000 retirement accounts, comprising over $11 billion in assets, into existing 401(k) or IRA accounts.
Prince: What are some of the benefits of auto portability?
Williams: Approximately $92 billion in assets leak from the U.S. retirement system every year because plan participants prematurely cash out their 401(k) savings accounts. This figure from the Employee Benefit Research Institute, the retirement services industry’s gold-standard research provider, illustrates what a serious retirement-saving crisis our country is facing. From a public policy perspective, it is highly beneficial to plug cash-out leakage, which is more prevalent among under-saved, under-served minority and low-income participants.
In addition, auto portability helps plan sponsors alleviate the hassles and challenges associated with small, stranded accounts from terminated participants. Through consolidation, auto portability reduces the number of small accounts that tend to have stale address information.
The Employee Benefit Research Institute estimates that approximately $2 trillion in extra savings would be preserved in the U.S. retirement system, across a 40-year period, if all retirement savers had access to auto portability. These additional savings would include about $191 billion for 21 million Black Americans, and $619 billion for all minority retirement savers.
Prince: How might small 401(k) accounts be wreaking havoc on a company’s plan?
Williams: A large number of small, stranded accounts from terminated participants not only strain plan recordkeeping and other administrative operations but also weigh down important metrics for benchmarking plan health, like average account balance. These metrics are often used as negotiating points with plan recordkeepers to determine fees.
Prince: Where do you see the retirement industry heading, and what are some actionable steps that plan participants can take today to set themselves up for retirement success?
Williams: I believe the retirement industry is heading toward a plan-design regimen that leverages defaults to improve participant outcomes. It has been going in this direction for some time, but the transition has been particularly aggressive since the Pension Protection Act of 2006 was signed into law. With that legislation, the industry received the green light to adopt auto-enrollment, and to aggressively use target-date funds as a default investment option. The Pension Protection Act really cemented the use of defaults for driving participation, contributions and investment selection.
The next default is portability. We’ve already seen the advent of portability for small balances, in the form of auto portability, which is now live, and more and more recordkeepers are adopting it. In the near future, we could see the industry leveraging the network effect from auto portability to, ultimately, facilitate large-balance account portability for all balances above $5,000, which require participant consent.
So, to sum it up, that’s where I see the industry heading. It is continuing to leverage defaults to maximize participant outcomes, with portability the next default to soon become ubiquitous.
As for what steps participants can take now to secure their financial futures, this is what I recommend. You can, first and foremost, enroll in your current employer’s 401(k) plans and let the defaults in those plans work for you. But don’t stop there. If the defaults ensure you are enrolled, that’s great. Typically, sponsors have participants enrolled at a 3% elective deferral. If you can afford more, put away more. At a minimum, contribute so you can get your full employer match. Contribute as much as your budget allows. If the default investment vehicle in the plan is a target-date fund, and it’s a good product, and you don’t have a financial advisor to help you with investment selection, that’s as good a place as any to keep your money. And, as you change jobs, continue to do that.
Crucially, you should consolidate your retirement money, either in your current employer’s plan or in an IRA you set up, during your working life. There should be only one place to consolidate your retirement money as you change jobs. Doing that regularly, and avoiding the temptation to prematurely cash out your account balance for a fast chunk of money, is the best way to achieve a good retirement outcome.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.