Retirement Clearinghouse Notes 4 Key Findings on Auto-Portability

Retirement Clearinghouse LLC, which runs the Portability Services Network LLC, last week released four key findings on automatic portability’s benefits over a projected 40-year period.

Using what it calls an auto-portability simulation, or APS, Retirement Clearinghouse made predictions assuming two developments: industrywide adoption of the auto-portability service and the widening availability of workplace retirement plans. For the latter it partly credits provisions in SECURE 2.0 and state-sponsored retirement plans.

The Portability Services Network launched services last year in earnest, with some of the largest recordkeepers in the country—including Fidelity Investments, Empower, and The Vanguard Group—making auto-portability available to plan sponsors that use their platforms. The study supports the consortium’s ultimate goal of getting all retirement plans in the country to automatically port over small balances instead of cashing them out to the participant or pushing them into an individual retirement account.

The firm’s findings include:

1) Increased retirement savings. The RCH model predicted that auto-portability of small-plan retirement balances in the U.S. will grow net incremental wealth of $1.6 trillion over the simulation period as compared with plans being cashed out or forgotten altogether.

“Over 40 years, under auto-portability, 175.6 million job-changing participants will consolidate (‘roll-in’) appreciated retirement savings of $1.75 trillion, vs. $155.2 billion without auto portability,” the report states. “That places the net incremental wealth generated by auto portability at $1.6 trillion.”

According to the study, the new projected value of auto-portability surpasses estimates by the Employee Benefit Research Institute, which initially pegged the present value of retained savings from auto-portability at $1.5 trillion for accounts under $5,000; this, however, falls short of EBRI’s estimate of $2.0 trillion in benefits for all balances.

2) More small-balance push-outs. For a second key finding, RCH projected that significantly more small-balance job-changers will be subject to new mandatory distribution provisions. Regardless of whether auto-portability is modeled or not, the number of such participants is expected to reach 342 million over the next 40 years—a 24% increase from the figure in the prior report, according to Retirement Clearinghouse.

The last publicly released APS model, in 2019, placed the figure at 226 million participants.

The new APS model result reflects the greater number of participants who meet the new $7,000 mandatory distribution threshold, which was raised from $5,000, effective December 31, 2023, by SECURE 2.0. The larger cohort also owes to expanded plan access assumptions, with 76% of the increase attributed to this.

3) Reduced leakage. The report’s third key finding was that auto-portability will dramatically reduce cash-out leakage. Over 40 years, cash-outs will average 31% under auto-portability compared with 72% without auto-portability.

“The 31% figure is a systemwide figure, including cash-outs occurring during the early phases of auto-portability’s eight-year adoption cycle, as well as ongoing, high levels of cash-outs incurred by the 20% of plans that do not adopt auto-portability,” the research states. “Plans that adopt auto-portability should experience a decrease in cash-out leakage to an average of 20% for sub-$7,000 balances,” it says.

4) Expanded DC access. RCH’s fourth key finding is that auto-portability will bring minority participation in defined contribution plans in line with demographic projections for America’s population overall.

“The race and ethnicity overlay applied to the APS presumes that—gradually over a 40-year period—expanded DC access will allow participation levels to mirror underlying population demographics,” the report notes. “As participation increases for minority demographic segments, these segments will derive disproportionate benefits from auto portability.”

Over the 40-year modeling period, auto-portability is projected to preserve an incremental $744 billion in retirement wealth for 98 million minority job-changers with balances less than $7,000. In addition, 30 million Black Americans are expected to preserve an incremental $216 billion in retirement wealth.

The Retirement Clearinghouse report on auto-portability includes data from the EBRI/ICI [Investment Company Institute] 401(k) database, the Department of Labor Form 5500 data, major recordkeeper cash-out surveys and RCH longitudinal data.