Neal Ringquist is Executive Vice President and Chief Revenue Officer of Retirement Clearinghouse, LLC (www.rch1.com), a portability solutions provider.
Russ Alan Prince: What is auto portability, and why is it important for workers to consolidate their retirement savings accounts as they move from job to job?
Neal Ringquist: Auto portability is the routine, standardized, and automated movement of an employee’s retirement savings account balance of under $5,000 from the sponsored retirement plan of their former employer into an active account in their current employer’s sponsored plan. Retirement Clearinghouse developed the technology to power auto portability to make it easy for American workers to transport and consolidate their 401(k) accounts at the point when they change jobs.
Historically, it has been extremely cumbersome and expensive to transport retirement savings account balances from one plan to another. Without seamless plan-to-plan portability, an easy option for plan participants who switch employers is to prematurely cash out their accounts. According to the Employee Benefit Research Institute, the US retirement system loses $92 billion in assets every year due to the abundance of premature cash-outs of 401(k) accounts. That’s a huge annual loss—and it demonstrates just how critical a problem the lack of seamless plan-to-plan asset portability is for Americans’ retirement preparedness.
On an individual level, even one cash-out during someone’s working life can be detrimental to their income in retirement. Our research at Retirement Clearinghouse has found that a hypothetical 30-year-old plan participant who cashes out a 401(k) account with a below-$5,000 balance today would forfeit up to $52,000 in savings that the sum would have accrued by age 65 if we assume the account would have grown by 7% per year.
Just one premature cash-out of a small 401(k) account on the journey to retirement can cause significant damage to someone’s retirement nest egg—but before the pandemic, EBRI estimated that the average American worker will change jobs 9.9 times over a 45-year period. This only added to the urgency of the need for the auto portability solution we developed.
Furthermore, Americans who are the most vulnerable to falling short of achieving a financially secure retirement—including minorities, young people, and low-income earners—are at higher risk of cashing out their accounts when changing jobs. Data from the largest retirement plan recordkeepers shows that 31% of all plan participants who switch employers wind up cashing out the 401(k) savings in their prior-employer plans within a year of their professional moves.
However, this data also indicates that the rate of cashing out within a year of job change is higher for minorities—63% for Black Americans and 57% for Latinos—participants earning $20,000 to $30,000 in annual income—50%—and women—41%.
All of these findings underscore why auto portability is such a vital technology solution for our industry and our country, and why so many partners from the private and public sectors joined forces with us to make it available. Clearly, the under-served and under-saved who are cashing out at higher rates would disproportionally benefit from an auto portability program.
Prince: Why is auto portability beneficial for plan sponsors?
Ringquist: Auto portability makes it easy for sponsors and their plan recordkeepers to locate and facilitate the transportation of small accounts from terminated participants. In effect, through consolidation, the number of accounts decreases but the assets are retained. This increases their plans’ average account balance, which is a key industry metric for evaluating the overall condition of a plan. Auto portability also reduces administrative hassles for sponsors, because small accounts left behind by former participants are prone to have stale address records.
Reducing the number of small accounts from former participants also decreases the number of accounts with balances below $1,000, which can be automatically cashed out by sponsors. If a sponsor cashes out a small account with under $1,000, mails the check to an out-of-date address, and the participant never receives the check, the sponsor could be held liable by the participant in the future. Auto portability mitigates the incidence of uncashed checks and the risk of this liability because it eliminates the need to automatically cash out small, stranded accounts with under $1,000.
Prince: Why is auto portability beneficial for advisors?
Ringquist: When plan participants transport and consolidate their retirement savings accounts as they change jobs, they can increase their retirement savings—and increase the number of assets that advisors can help them manage.
For advisors that represent plan sponsors, auto portability enables their clients to optimize their plans, strengthen engagement with participants, and better fulfill their fiduciary duty while mitigating potential liability.
Prince: How is the new retirement services industry consortium helping to accelerate the nationwide adoption of auto portability?
Ringquist: Earlier this year, history was made in the retirement services industry. For the first time ever, some of the major plan recordkeepers have come together to create a joint venture for helping Americans across the country to save more for retirement.
In October 2022, three of the largest recordkeepers in the industry announced that they had partnered with us to create a consortium of retirement plan recordkeepers, Portability Services Network, LLC—PSN—marking the first time the industry had come together to solve a problem—cash-out leakage. This entity acts as a nationwide digital clearinghouse for automatically locating a participant’s active account in their current employer’s plan, and transferring that participant’s account balance from their former employer’s plan into their active account.
The PSN is governed as an industry utility, and all plan recordkeepers can participate—but none of the clearinghouse’s owners or participants receive any compensation for auto portability transactions. It is designed to operate at the lowest cost to participants.
The establishment of a nationwide clearinghouse connecting plan recordkeepers, sponsors, and participants all over the US makes it possible for auto portability to enable millions of Americans to save more for retirement. EBRI estimates that, if auto portability is widely adopted throughout the country over a 40-year period, $1.5 trillion in savings—measured in today’s dollars—would be preserved in the U.S. retirement system, including $619 billion for 67 million Black and minority workers, and $365 billion for 42 million women participants of all ethnicities.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.