Deals & People October 6, 2022

Retirement Clearinghouse Partners with Fidelity, Vanguard and Alight on Auto-Portability

The Portability Services Network seeks to make it easier for participants to transfer retirement assets when they change plans.

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Fidelity Investments, Vanguard, and Alight Solutions have partnered with Retirement Clearinghouse to create the Portability Services Network, a consortium of workplace retirement plan recordkeepers that seeks to tackle the issue of cash-out leakage from small retirement accounts and accelerate the nationwide adoption of auto-portability.

The Portability Services Network will use the Retirement Clearinghouse’s auto portability solution to build a nationwide digital hub connecting workplace retirement plan recordkeepers and the plan sponsors they serve, according to a release from Retirement Clearinghouse. Their goal is to help America’s underserved and under-saved workers improve their retirement outcomes.

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Automating the process of moving 401(k), 401(a), 403(b), and 457 account balances from plan to plan when workers change jobs will help mitigate cash-out leakage and preserve trillions of dollars in savings for participants, particularly benefiting minorities, women, and low-income workers.

Cashing out has traditionally been seen as an easier option than the current manual process of transferring from plan to plan. Cash-out rates for job-changing minorities, low-income workers, and women are also higher than average

PSN will act as a clearinghouse for automatically locating a participant’s active workplace retirement account in their current employer’s plan and transferring the same participant’s account from their prior employer’s plan into their active account.

In addition to Alight, Vanguard, and Fidelity, the Portability Services Network will be majority owned by RCH with Robert Johnson, founder and chairman of The RLJ Companies and RCH Chairman, as its chairman. The consortium is designed to include up to three additional major recordkeepers as owners. PSN’s owners will govern the network as an industry utility designed with the goal of operating at the lowest cost to workers participating in auto portability.

PSN is open to all recordkeepers to connect, said Neal Ringquist, RCH executive vice president and chief revenue officer. As the consortium grows, there will be more competitive pressure to join the program. Plan sponsors who want to join will only need to ensure their recordkeepers have implemented the technology.

“I think there’ll be an enormous amount of pressure on the industry to adopt auto-portability and it’s a level playing field for everybody that participates,” Ringquist said. “Every recordkeeper that comes on, whether they’re a member, owner or just a participating recordkeeper, everybody operates within the auto-portability clearinghouse by the same rules. There [are] no advantages conferred on any particular member from an operational standpoint. Everybody’s treated the same and it’s all for the benefit of these participants to plug cash out leakage.”

According to the release, the consortium currently represents about 44 million workers across more than 48,000 employer-sponsored retirement plans.

“There is no precedent for [this type] of an effort with three record keepers locking arms and saying, we’re going to tackle this issue of cash out leakage for small accounts,” said Spencer Williams, founder, president and CEO of RCH. “Every day, Alight and Vanguard and Fidelity will be out there working with their clients and prospects, and frankly, anybody they can get their hands on advancing the cause of auto-portability. That creates a huge favorable trend for adoption for auto-portability.”

Williams says that auto-portability can be analogous to auto-enrollment. They want to create a new default and change people’s behavior. Instead of cashing out their retirement balance when a person changes job—paying taxes, penalties and forgoing decades of compounding interest—they would automatically be enrolled to have their balance rolled over into their new employer retirement plan.

As the consortium scales, the cost of rolling over a retirement balance has gone down for participants, Williams said. The highest price will be about $30, which is “roughly half” of what RCH would charge when it was working on its own. The price is expected to drop for participants over time as the group continues to expand, he adds.

Washington has also stated to recognize the importance of auto-portability, Ringquist adds. He hopes to see incentives for plan sponsors to adopt auto-portability, in the form of tax credits, with the recently introduced bill known as the Advancing Auto-Portability Act of 2022 and the SECURE 2.0, referencing to two Senate bills, the Enhancing American Retirement Now Act and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act—aka the EARN Act and the RISE & SHINE Act—as well as one House bill, the Securing a Strong Retirement Act. The three bills aim to increase Americans’ access to retirement accounts.
Data & Research October 6, 2022

Millennials May Be Headed Towards a Rocky Retirement, Research Shows

The Pension Research Council at Wharton Business School published findings that suggest millennials will likely have lower relative retirement savings than previous generations.

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Millennials may have a harder time maintaining their standard of living due to a variety of factors, according to research from the Pension Research Council at the Wharton School of Business at the University of Pennsylvania.

At a glance, there is reason for both pessimism and optimism. Among early millennials, male labor force participation is down from past generations, with 89% of men born from 1986 to 1990 in the workforce, compared to 96% of those born 1941 to 1945.

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Rates of marriage and homeownership are also down. Those without a spouse are more at risk for income insecurity during retirement since they cannot bundle resources with their partner and are ineligible for various government benefits afforded to married people. Lower rates of home ownership make it more difficult for early millennials to accumulate wealth that they can liquidate or borrow against during retirement.

The authors note, however, that early millennial women have higher earnings and education from past generations, though the labor force participation rate of women born from 1981 to 1985 (73%) is about the same as women born from 1971 to 1975 (76%). The shrinking life expectancy gap between men and women should also lower the widowed rate, an important factor since widows are particularly at risk for retirement insecurity.

The study focuses in on adults born from 1980 to 1989, dubbed “Early Millennials.” To project future economic metrics that allow them to predict millennial retirement security such as income, wealth, inflation, and cost of borrowing, the researchers used the Urban Institute’s Dynamic Simulation of Income Model. The model relies on household surveys, and tries to estimate the number of people who will get married, lose a spouse, lose a job, have a child, or any number of other factors that could influence retirement security.

The authors set clear parameters for inadequate retirement savings. Retirement income is inadequate if it falls below 25% less than the projected national average annual income, or if it fails to replace 75% of pre-retirement wages. Retirement income that equals or exceeds average annual income is adequate regardless of replacement rate.

They estimate that 38% of millennials will have inadequate retirement income, compared to 28% of those born 1937 to 1945. This finding also assumes that Social Security will continue to pay out at its current rates, even though it is expected to have to cut benefits in 2035 due to insufficient assets. In the event that Social Security is not reformed, and benefits have to be cut, retirement insecurity among millennials would rise to 49%.

Early millennials retiring by age 70 will have a higher income than past generations but face higher retirement insecurity due to higher costs of housing and out-of-pocket healthcare expenses, as well as longer life expectancies.

The authors also note that there are stark differences among racial groups and educational categories among millennials, with Hispanics and those without a high school degree being among those most at risk for retirement insecurity.

The authors write: “Inadequate retirement income is especially prevalent for people of color, people who did not attend college, people who never marry, and people with limited lifetime earnings. We project that, among Early Millennials, 53 percent of Hispanic adults, 42 percent of Black adults, 66 percent of people who did not complete high school, 45 percent of people with no more than a high school diploma, and 50 percent of people who never marry, will have inadequate income to meet basic needs at age 70 or maintain their preretirement living standards. Additionally, 64 percent of people in the bottom quintile of the lifetime earnings distribution are projected to have inadequate income at age 70.”

The millennial generation is also more unequal than past generations in this respect due to increasing income inequality. Between the “pre-boomers” (those born 1937 to 1945) and early millennials, income from the bottom quintile has increased by about $3,000 in inflation adjusted dollars, vs. $62,300 in the top quintile.

Much of the increased precarity of millennials is due to income inequality among their generation, even with the rapidly narrowing racial and gender gaps in retirement security noted by the authors.

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