Administration July 21, 2023

Auto-Portability, Step by Step

With recordkeepers accounting for 63% of the defined contribution market already on board, the Portability Services Network is picking up steam. Here’s how it works.
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Art by Gizem Vural

Defined contribution plans’ leakage, especially among participants with smaller balances, has been widely documented. Automatic portability, which Charlotte, North Carolina-based fintech company Retirement Clearinghouse defines as “the routine, standardized and automated movement of an inactive participant’s retirement account from a former employer’s retirement plan to their active account in a new employer’s plan,” has been promoted since 2014 as a potential solution to leakage.

The auto-portability movement has gained momentum recently, culminating in the 2022 formation of the Portability Services Network, owned jointly by RCH and several of the largest U.S. recordkeepers. Spencer Williams, president and CEO of both RCH and the PSN, says the PSN is meant to serve as a utility for the retirement industry. PSN “is not an entity that is seeking profit for itself,” he explains. “We seek to deliver auto-portability to retirement plan participants at the lowest possible cost.”

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RCH provides the PSN with the people and the technology necessary to deliver auto-portability to the market, Williams explains. Participating recordkeepers bring their plan sponsors to the arrangement, and those sponsors bring the participants. Neal Ringquist, RCH’s chief revenue officer, notes that PSN reaches 63% of the defined contribution marketplace, based on the six original PSN owner/members (Alight, Vanguard, Fidelity, TIAA, Empower and Principal).

Coordination Required

Auto-portability sounds simple enough. Plan participants change jobs; PSN tracks them to their new employer and verifies their identities; employees consent to a balance transfer; and the funds from their previous plan are added to their new plan’s balance.

From an operational and legal perspective, auto-portability “wraps around” a mandatory distribution provision, says Ringquist: “In order to do auto-portability on a negative consent basis, you have to both force small balances out of a plan on a negative consent basis, as well as roll those balances into a plan on a negative consent basis.”

These transfers require coordination among recordkeepers and sponsors, plus extensive data processing. Participating recordkeepers must be both sending and receiving recordkeepers. That means a recordkeeper and its plan sponsor-clients agree that terminated participants who are eligible for auto-portability because they meet the mandatory distribution provisions will be forced out of the plan and their data included in PSN’s systemwide queries. Also, each recordkeeper and plan sponsor must also accept roll-ins of new hires’ transferred balances to their plans.

There is a role for positive consent but per the RCH site, “If no affirmative consent is provided, RCH will rely on negative consent to complete the roll in transaction if no participant response to properly delivered auto portability notifications.

Transfers require reciprocity between force-outs and roll-ins at the sponsor level. For instance, a plan might currently retain departing employees’ account balances greater than $1,000 and cash out accounts with less than $1,000. Plans are permitted to involuntarily distribute terminated vested accounts less than $5,000.  If the sponsor wants to include an auto-portability feature to eliminate issuing multiple small checks and the uncashed check problem, it will be able to accept negative consent roll-ins only at less than $1,000.

Ringquist explains that every roll-in comes through an RCH IRA, either a safe harbor IRA or a conduit IRA. While more than 95% of plans allow roll-ins from other plans, only about two-thirds allow roll-ins from IRAs, he notes, citing Plan Sponsor Council of America data. Plans that do not currently allow roll-ins from IRAs and want auto-portability will need to modify their plan documents to accept IRA roll-ins. Plan sponsors will not have any technology build-outs to adopt auto-portability, but they will need to add a data-sharing provision to their recordkeeper contracts.

Moving Data

From a high-level perspective, RCH describes auto-portability as “an electronic records matching technology that is used to locate and match participant accounts across recordkeeping platforms.” A set of 14 application programming interfaces, known as APIs, are an essential part of automating the locate-and-match technology. These APIs allow recordkeepers and PSN to automatically exchange the data required to search for participants who left their previous plan and subsequently enrolled in a new plan (assuming both plans are with a PSN recordkeeper).

The APIs are also used to enter requests to bring additional companies and plans into the network; to share eligible accounts; to locate and match active accounts; to request and share account details when a participant is located as active in a new plan; to inform of a known bad address or opt-out elections; and to initiate and confirm rollovers into a new plan, according to Steve Holman, head of Vanguard’s Distribution Enablement Group.

The process starts when a participant qualifies to be forced out of his or her previous plan. At that time, the plan’s recordkeeper automatically sends the participant’s Social Security number and account number to PSN. It then replaces the account number with a randomly generated number in a new data set, says Ringquist. PSN then uses its Locate API and sends that data set to its member recordkeepers, who query their databases of plans signed up for auto-portability, seeking the participant’s Social Security number at the new plan.

When an individual is located by Social Security number, the recordkeeper uses the PSN Match API and sends PSN a data set in which they drop the participant’s Social Security number and add certain demographic data to the previously generated random number. PSN goes back to the sending recordkeeper and asks for the same data set. PSN runs the two data sets through a match algorithm to verify the individual’s identity; the entire process is completed by API calls. “To the extent that that account detail is matched above a particular score, that starts the consent process, and PSN sends consent notifications to the individual as we’re operating right now under Department of Labor guidance,” says Ringquist.

Implementation timeline for recordkeepers

The recordkeepers that recently joined PSN have distinct timeframes for introducing auto-portability to their plan sponsors. Ringquist says the implementation consists of three steps.

First, the recordkeeper defines its business requirements for auto-portability. The second step consists of building the APIs. The final step is to test the process. Testing is extensive, because queries can involve millions of records being queried across the recordkeeper’s book of business, Ringquest emphasizes: “I’d say this is a six-month effort when you look at those three phases to get something like this completed from a recordkeeper’s perspective.”

Holman says Vanguard plans to go live with auto-portability on October 1. So far, sponsors’ initial reactions have been universally positive, he says. “They see the value to the participants, and they see the ease of joining the network,” Holman explains. [But] “we’ve only been able to share with them in concept, so they want to see the legal contract that they’re signing to join. We’ll be ready to share that information with the plan sponsors very shortly.”

Benefits July 3, 2023

Equity in Plan Design Starts With Understanding Demographics, Expanding Eligibility

To provide broader and more equitable access to retirement savings for all participants, plan sponsors should consider auto features, new SECURE 2.0 provisions, and tracking demographics to make adjustments, according to researchers.
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Art by James Yang


When thinking of ways to improve equity within a retirement plan and address the needs of all participants—whether they are low-income earners, early-career or part-time employees—plan sponsors need to first and foremost understand the demographics of their organization, according to retirement plan researchers.

It is commonly the case that demographics such as racial self-identity, socioeconomic class, gender identity and other factors are not tracked within a retirement plan, according to Benjamin Taylor, senior vice president and head of tax-exempt defined contribution research at Callan LLC.

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“If you’re not tracking [demographics] in your plan, it’s difficult to identify gaps in coverage or gaps in efficacy,” Taylor explains.

Taylor says people who earn the most and “benefit most economically from society” tend to benefit the most from workplace retirement plans. If a plan sponsor is seeking to address this issue, Taylor says it is important they are not “squeezing the balloon” and affecting employees’ ability to pay for childcare or other aspects of their home life, for example.

Assistant Secretary of Labor Lisa Gomez, the head of the Employee Benefit Security Administration, said at the PLANSPONSOR National Conference in Orlando, Florida that retirement equity is one of the Department of Labor’s primary objectives right now.

“The majority of people do not have access to retirement savings and an opportunity to save for retirement through their employment,” Gomez said. “This is really scary, particularly for underserved communities, for women, for caregivers.”

Angela Antonelli, research professor and executive director for the Center for Retirement Initiatives at Georgetown University, says that when it comes to retirement savings, white households have a median retirement account balance of $80,000, compared to $35,000 for Black households and $31,000 for Latino households.

Additionally, according to a recent Voya Financial study, Black and Latino workers have lower retirement plan participation rates and savings rates compared to white and Asian American workers. However, this study found that this gap closes significantly in plans that offer automatic enrollment.

Black and Latino employees had a two- to-three times higher participation rate at an employer who offered auto-enrollment compared to their peers at an employer who did not offer aut-enrollment, according to Voya.

Antonelli says auto features are the “foundation for having more people save.”

“Inevitably, if you have more people save, you’re going to be reaching those groups of people who typically have been left out, so you’re going to reach more women, more people of color,” Antonelli says.

According to the PLANSPONSOR 2022 Defined Contribution Survey results, which incorporates responses from 2,562 plan sponsors from a broad variety of U.S. industries, 47.1% of respondents said their plan offers auto enrollment and the majority said the default deferral rate is between 2.1% to 3%.

Eligibility Comes First

Before plan sponsors even begin to consider auto features, Anqi Chen, senior research economist and assistant director of savings research at the Center for Retirement Research at Boston College, says plan sponsors need to ensure that all participants actually have access to retirement savings programs and do not have to jump through eligibility hoops.

Chen says that many firms do not provide access to a retirement plan for part-time workers, and there are often tenure requirements for eligibility. For example, a company can require that a person have worked there for at least three years before they are eligible to contribute to a plan or receive an employer match.

The SECURE 2.0 Act of 2022 aims to break these barriers by requiring all new 401(k) and 403(b) plans established after the enactment of the legislation to automatically enroll new employees at an initial contribution amount between 3% and 10%. This is a mandatory provision that begins in 2025. The new law also reduces to two years from three the required years of service before long-term, part-time workers are eligible to contribute to an employer sponsored plan, including and ERISA-covered 403(b) plan, effective for plan years beginning after Dec. 31, 2024.

“I think the eligibility issue is definitely one of the most important factors for increasing equity because if you don’t have access to it, you’re not saving, and the first step to saving for retirement is going to be having access to one of these plans,” Chen says.

Once the barriers to eligibility are addressed, Chen says plan sponsors can evaluate why there may be a lack of retirement plan participation among certain groups.

Given eligibility, Chen explains that participation is typically high among higher income groups but can drop to about 60% among lower income groups. Lower wage workers may be more hesitant to contribute 6% of their salary, for example, in order to receive their full employer match, Chen says.

These workers who are more budget-constrained are unsure if they can sacrifice this percentage of their earnings to a retirement plan, so ultimately, the employer in this situation is likely giving more money to higher wage workers who are able to set aside that money for retirement, she notes.

Another reason why an employee might not be contributing to their retirement plan could be because they are trying to pay off student loans or other kinds of debt.

A study conducted by the Urban Institute found that debt disproportionately burdens racial minorities. For example, the study concluded that compared to an older adult in a majority-white community, an older adult in a community of color is more likely to have some type of delinquent debt, carry a higher balance of total delinquent debt and have a higher balance of medical debt in collection.

Chen says employers need to be thinking about whether a matching contribution or just a contribution for anyone who is eligible would better address the equity needs of their company. This idea of a plan that does not require an employee contribution is not unprecedented, Chen explains, as small-business plans, such as SEPs and SIMPLE IRAs, do not require employees to contribute in order to receive a match.

In a SEP IRA, only employers can contribute to the plan, and employee contributions are not permitted. With a SIMPLE IRA, employers are required to make annual contributions, but employee contributions are discretionary.

SECURE 2.0’s Impact

New provisions in the SECURE 2.0 Act of 2022 may also provide avenues for employers to address equity in their retirement plans.

For plan sponsors who are looking to target groups who are overburdened with debt, Taylor says the student loan matching provision in SECURE 2.0 is a benefit that could greatly increase equity for the workforce. The new provision allows employers to offer matching 401(k), 403(b), 457(b) and SIMPLE IRA contributions if the participant elects to pay down student loans instead of contributing to a retirement plan.This option will be available starting on December 31, 2023.

“I think [the student loan provision] is a major area of potential focus for plan sponsors who want to increase equity,” Taylor says. “It’s important because [it] affects not just younger people who have student loans, but it can cover those who are cosigners.”

Taylor says data indicates that many people who are in their fifties and sixties, and still working, will often have student loan debt because they have cosigned on their children’s loans.

In addition, Taylor says the emergency savings provision in SECURE 2.0 could have an impact on retirement equity.

Beginning in 2024, employers will be permitted to create a “sidecar” account tied to a non-highly compensated participant’s retirement account. Employees may voluntarily contribute or may be automatically enrolled at up to 3% of their annual pay, and take distributions at any time. This account is capped at $2,500 annually or a lower limit created by the plan sponsor.

SECURE 2.0 also allows a participant who has been a victim of domestic abuse to receive a distribution from their 401(k), 403(b) or 457(b) plan. The provision would allow the individual to take out a maximum of $10,000 or 50% of their vested account balance without getting hit with the standard 10% tax penalty for early withdrawal.

According to CPA firm Schneider Downs, the distribution must be taken within 12 months of the domestic abuse incident, and if a plan were to adopt this provision it could allow for the participant to self-certify that the incident of domestic abuse actually occurred.

Taylor recommends that plan sponsors evaluate these provisions as a starting point to addressing equity in their plan design. But before implementing these benefits, he says plan sponsors should first focus on tracking demographics in their plan, tracking asset allocation by demographics, savings rates as a percentage of income, as well as “getting people in the door early” by implementing auto-features.

How State-Sponsored Plans Address Equity

Currently, a total of 18 states have enacted state-facilitated retirement savings programs for private sector workers who would not otherwise have access to a retirement account.

Antonelli says the addition of new auto-IRA programs in 2023, such as in Nevada and Vermont, provide the ability for more workers to begin to save for retirement with the tax advantages of a workplace plan..

Auto-IRAs, in particular, require employers who do not already offer a qualified retirement plan to register their workers to be automatically enrolled. Antonelli says that many small businesses, in particular, do not offer employer-sponsored retirement plans because it can be administratively burdensome, as well as costly to provide an employer match.

In addition, Antonelli says with SECURE 2.0, the Saver’s Tax Credit creates a new type of contribution for low to mid-income workers. The Saver’s Credit allows for qualified individuals participating in a retirement plan or contributing to an IRA to receive up to 50% nonrefundable tax credit of a maximum contribution of $2,000 (or $4,000 for if married filing jointly).

Antonelli argues that this provision will help boost people’s savings over the long term.

“If we’re closing that access gap [to retirement savings], we’re going to be reaching groups that have been historically underserved,” Antonelli says. “Going forward, if we really want to be able to more effectively assess the extent of the inequality of wealth and retirement savings… employer-sponsored plans, as well as government entities, [need] better [demographic] data about their retirement plans and programs.”

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