Data and Research November 8, 2017

Retirement Clearinghouse Releases Findings From Auto Portability Use

Results from the firm’s product use by one plan sponsor found that upon consolidation, workers' median plan account balance increased by 46% and the combined future value of their preserved savings was more than $3 million at normal retirement age.

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A new report documents the key findings from auto portability’s inaugural market launch with Retirement Clearinghouse.

The auto portability service was launched in July 2017, and later that month Retirement Clearinghouse (RCH) executed what it says is the industry’s first fully automated, end-to-end transfers of retirement savings from an account holder’s safe harbor IRA into their active plan accounts. The service—conducted for a large plan sponsor in the health services sector—is ongoing and consists of four core technological processes: an electronic-record location search to identify multiple accounts potentially belonging to the same individual; a proprietary “match” algorithm to confirm the located accounts belong to the same participant; receipt of the participant’s affirmative consent to consolidate accounts in their active retirement plan account; and an automated roll-in transaction.

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Boston Research Technologies compiled and analyzed data for more than 3,000 participants that had both a safe harbor IRA and an active defined contribution (DC) plan account with their current employer and found 15% of participants with matched accounts responded to the roll-in offer, which the report says is a rate measurably higher than direct mail solicitation and a strong indication of pent-up demand.

Ninety-one percent of the responding participants gave their consent to the transaction and had their savings consolidated in their active-employer plan. Only 9% of participants opted out of the program, with a majority of them choosing to cash out their accounts.

Of all the account balances that were consolidated through a roll-in, 56% were less than $1,000, which the paper says demonstrates that when given the choice, participants prefer to retain these balances and don’t want them automatically cashed out of plans.

Upon consolidation, workers’ median plan account balance increased by 46% and the combined future value of their preserved savings was more than $3 million at normal retirement age.

According to the report, 85% of participants with matched accounts did not respond to the roll-in offer, but it suggests their lack of response was likely the result of self-destructive behavior or lack of knowledge about where to start rather than a preference to cash out. The report found that 90% of account holders with less-than-$5,000 in their accounts opted to roll their assets into a safe harbor IRA. However, out of those account holders, 86% had been in a safe harbor IRA for more than one year, and 44% were in a safe harbor IRA for more than three years.

“While [the] report is very encouraging, the results so far represent just the tip of the iceberg,” says Spencer Williams, founder, president and CEO of Retirement Clearinghouse. “We can clearly see the potential to preserve trillions of future retirement savings dollars for tens of millions of hardworking Americans through the widespread adoption of auto portability.”

The full report, entitled “Making the Right Choice the Easiest Choice: Eliminating Friction and Leaks in America’s Defined Contribution System,” is at https://info.rch1.com/hubfs/brt_choice_white_paper_HR.pdf.

Data and Research November 8, 2017

Mercer Makes Proposals for Addressing America’s Retirement Security

Creating open MEPs, encouraging the use of lifetime income products and removing impediments to employers maintaining DB plans are just a few of Mercer’s suggestions.

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Working with the World Economic Forum, Mercer has estimated the long-term savings gap in the U.S. at $27.8 trillion at the end of 2015, and it says longer life spans will cause that number to grow significantly. In addition, widespread lack of financial knowledge—coupled with a continued inability to save and limited access to workplace plans or other effective savings vehicles—could cause the gap to reach $137 trillion by 2050.

In a point-of-view white paper, Mercer offers several specific policy recommendations to address what should be done now to enable more Americans to retire with confidence:

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  • Support retirement security through tax policy;
  • Improve access to retirement plans for more Americans facilitated through the workplace;
  • Build on the success of the private retirement system; and
  • Remove impediments to employers maintaining defined benefit (DB) plans.

Mercer contends that strong participation rates in 401(k) plans show they are an effective means to encourage savings. It urges policymakers not to exacerbate the already-significant savings gap in America and risk the progress employers have made in encouraging their employees to save by disrupting the current tax treatment of 401(k) contributions. The recently released tax reform bill indicates Congress is not considering doing so.

As Congress considers retirement issues, Mercer says it’s critical to focus on policies that will help expand plan coverage and help individuals and employers generate more savings and retirement income. The research says one of the most promising ways to address this challenge is to remove current barriers to creating “open” defined contribution (DC) multiple-employer plans (MEPs) by private-sector organizations. Open MEPs would be freed from the current requirement that participating employers have common ownership or a common business purpose.

Mercer notes that automatic payroll deduction IRA plans also hold promise as a way to expand plan coverage, and a number of states are moving to offer these arrangements to private-sector workers. However, it believes the potential patchwork of inconsistent state-run programs may create obstacles for employers with operations in more than one state. The white paper says employer-based plans offer significant advantages to IRAs in the form of substantially higher contribution limits, the possibility of employer matching contributions, generally lower costs and the Employee Retirement Income Security Act’s (ERISA)’s participant protections.

Strengthening the current employer-based retirement plan system

To strengthen the current system of employer-based plans, Mercer suggests policymakers encourage greater access to lifetime income products. Mercer says a clear safe harbor from liability for selecting an annuity provider would facilitate this, as the current Department of Labor (DOL) guidance with respect to annuity selection from a DC plan is too vague to be helpful to plan sponsors. Facilitating the portability of lifetime income options, which will permit participants to preserve their lifetime income investments and avoid surrender charges and fees, would also be helpful.

Mercer also suggests an alternative automatic enrollment/escalation 401(k) safe harbor plan should be created with higher default deferral rates. Unlike the current automatic enrollment safe harbors, which require an initial participant deferral rate of 3%, the new safe harbor plan’s initial deferral rate should be 6% and escalate to 10% in subsequent years. The design would also allow employers to match employee contributions up to 10% of pay.

A not-for-profit industry clearinghouse, similar to the Depository Trust Clearinghouse Corporation, could facilitate the automated transfer of assets from plan to plan or from plans to individual accounts and vice-versa, Mercer says. This new clearinghouse would help reduce leakage associated with low-balance individuals cashing out their savings when changing jobs, would help individuals better consolidate and manage their retirement benefits, and would reduce instances of “lost benefits.”

The paper points out that short-term and emergency financial needs can cause individuals to tap their retirement accounts, incurring taxes and penalties. Mercer says some of this leakage could be prevented by allowing employers to automatically enroll workers in savings programs for both retirement and more immediate needs, such as paying off student loans or buying a home. In addition, for those currently enrolled, allowing them to continue contributing after they have made a hardship withdrawal would avoid further diminishing their savings. The current tax reform proposal includes a provision that would allow participants to continue contributing.

Finally, Mercer encourages policymakers to remove impediments to employers maintaining DB plans by taking Pension Benefit Guaranty Corporation (PBGC) premiums “off budget,” and by revising nondiscrimination testing rules for frozen DB plans. The Internal Revenue Service (IRS) has issued such nondiscrimination testing relief, and the current tax reform proposal would make this permanent.

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