In a recent forum cohosted by Retirement Clearinghouse, EBRI, Wiser and the Financial Services Roundtable, experts shared how automated retirement portability programs could be the key to increased participation in private-sector retirement plans.
Today, at least 64% of Americans say they do not have sufficient funds for retirement and less than half of private-sector workers participate in workplace retirement programs. Former U.S. Sen. Kent Conrad, a Democrat from North Dakota, says these statistics could improve through better access to workplace retirement savings plans.
“So many small businesses tell [Congress], ‘Look we’d like to offer a plan, but we just can’t afford it,’” Conrad says. “We take the liability off of their shoulders, we take the administrative difficulty off their shoulders and allow a third party to administer the plans, run the plans and have the financial responsibility for the plans, which makes a big difference for employers.”
With these improved access points to savings plans, Conrad says the opportunity arises to create new retirement security plans for smaller businesses with fewer than 500 employees, enabling multiple employers — even from different industries — to band together to offer their workers low cost, well-designed options.
“Once the [savings plan] has been put in place for a period of time, we then introduce a nationwide minimum coverage standard for businesses with more than 50 employees,” Conrad says. “Any mandate is controversial, but legally if you dramatically simplify (don’t require employer match) really all they have to do is payroll deduction, and then it becomes not unreasonable for employers with 50 or more workers to offer some kind of plan.”
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How to achieve auto-portability
Once plans have been made available for employers of all sizes, Jack VanDerhei, research director for the Employee Benefit Research Institute, recommends three different scenarios for auto-portability of retirement plans between employers.
1) Full auto-portability. VanDerhei considers this to be the most efficient scenario, where every participant consolidates their savings in their new employer plan every time they change jobs. The goal would be that all participants arrive at age 65 with only one account accumulated over the span of their working life.
2) Partial auto-portability. In this scenario, every participant with less than $5,000 — indexed for inflation — consolidates their savings in their new employer plan every time they change jobs. “If you have $5,000 or less in your account balance at the time you change jobs, leakage would only come from hardship withdrawals,” VanDerhei says. This means that money would only leave the account if the participant determined it necessary to take money out to pay for a necessity.
3) Baseline: status quo. In addition to hardship withdrawals, there is a participant-specific probability of cashing out and loan default leakage at the time of job transition. These participant specific leakages can be age, income, account balance and how long the participant has been with the employer.
VanDerhei says the younger the participants are to begin using full auto-portability of retirement plans, the more likely they are to get the most out of their retirement savings once they reach the age of 65.
“If you look at people who are currently between the ages of 25 and 34, under a partial portability there is a chance for accumulation to reach $659 billion and under a full portability there is a chance to reach $847 billion in accumulation,” VanDerhei says. “As you would expect, accumulation will decrease as the age increases if they choose to enter into auto-portability later in life.”
Spencer Williams, president and CEO of Retirement Clearinghouse, LLC, says although retirement portability has been codified into ERISA there are not enough mechanisms involved to encourage participants to continue to save for retirement rather than cashing out.
“We have a little more than a third of the population cashing out when they change jobs,” Williams says. “The research shows that if you fix that problem, the difficulty moving peoples’ money, we will begin the process of reducing leakage.”
Once a retirement account reaches a certain amount, Williams adds that participants will begin to take the account more seriously and have more desire to continue investing in the plan.
“We need to create an efficient and effective means by which people can have their money moved for them, and in doing that we begin to change peoples’ behavior,” Williams says. “Finally, if we increase access and coverage, along with auto-portability, all of those benefits accrue from all those new participants in the system.”
