401(k) Plans & Auto Portability: Should Your Suite of Auto Plan Features Include Rollovers?
Founder, President & CEO
Spencer Williams is Retirement Clearinghouse’s Founder, President and CEO. Retirement Clearinghouse is a specialized provider of portability and consolidation services for America’s mobile workforce and has serviced more than 1 million job-changing participants during Mr. Williams’ 9 year tenure with the company. Prior to joining Retirement Clearinghouse, Williams served in a number of senior executive roles at MassMutual Financial Group, and as a retirement Services executive at Federated Investors, Inc.
Williams earned his B.A. degree in English from the United States Naval Academy and an M.B.A. from the University of Pittsburgh.
Recap, Highlights, and Thoughts
In a somewhat related follow-on to our conversation last week about the long term impact of automatic enrollment, today we tackle the emerging auto concept of auto portability. My guest, Spencer Williams, Founder & CEO of Retirement Clearing House has been intimately involved in the process to get this off the ground and available in a workplace retirement plan near you! As you might expect, we discuss what auto portability is, the retirement challenges it intends to solve, how it differs from todays auto-cashouts or auto-rollovers and much more. We also wax philosophical once or twice and be sure to stick around for the end where Spencer shares how employers or retirement service partners can help move the auto-portability concept further down the road.
As we get ready to kick off a new year and new decade for that matter, I would love to get any input on bigger picture topics or guests you would like me to tackle. Send your ideas to firstname.lastname@example.org. We will take it from there.
Thanks for listening!
Sincerely Your Host,
NEW: Episode Transcript
Rick: Well, Spencer, welcome back to the podcast. It's been a little while, and you've sure been busy over there. So I am excited to hear what you've been up to, and what the state of auto portability is. So thanks for being here.
Spencer: You're welcome, Rick. It's great to be back, and looking forward to diving deep into that topic. It's near and dear to our hearts.
Rick: Well, I'm glad because it's something that I'm really interested in exploring, and I couldn't think of a better guy to talk about it with. So, maybe start us out with just big picture, what's the need for auto portability? Why is this an important concept? Why is this an important conversation?
Spencer: Yeah, great question, Rick. But I'm going to step all the way back and just sort of lay a broad landscape, which is, there's a need, sort of nationally for a rebalancing of savings versus consumption. You can hardly pick up the paper. Of course, nobody picks up a newspaper anymore, but you can hardly read a story online anymore without reading about retirement savings inadequacy, okay? So we go from big picture rebalancing, savings versus consumption, people are retiring with insufficient savings to last them a lifetime, okay?
Spencer: So auto portability is all about creating an easy mechanism. In fact, a default mechanism I know we'll get to that in this conversation. What do you mean by default? That makes it really easy for people, consumers, workers, who have already saved money to keep it saved, keep it growing, keep it in the retirement system, that's the entire nut, objective of auto portability.
Rick: Versus today, what are you seeing happening?
Spencer: Yeah, this is very well documented. You could go to the Employee Benefit Research Institute. You could look at Vanguard's annual How America Saves report. You could look at some recent Alight Solutions Research. They all say the same thing. And here's what it says, particularly for a worker who is changing jobs, and has a small account and just for definitional purposes, we'll stick with kind of a regulatory version of a small account, say that's a person with less than $5,000, all right? So we know who we're talking about. Someone who's changing jobs, they've managed to save $5,000 or less in their retirement account.
Spencer: At the point of job change, 55 out of every 100 of those workers are cashing that money out, and it gets worse, okay? It gets worse because over the next couple of years, we've been able to follow people who did not cash-out immediately, that number jumps up to 75 out of 100. So you're getting 75 out of hundred people. We now know who they are and what their life circumstances are, are cashing out their retirement savings at the time of job change, they're paying taxes, they're paying penalties, and the money disappears into the consumer society.
Rick: And is that just for people with balances under 5000? Or are you and the work that you guys have done on some of those numbers, is that a broader statement for all people with a retirement balance that are changing jobs?
Spencer: Yeah, great question. So it does apply to all, okay? But there's kind of a curve that follows its inverse to the account balance. So the most severe problem is for the demographic we just talked about, right? Which is less than $5,000. But when you look at the entire system, all balances for people changing jobs, and that point of job change just for clarification, why is that? It's so important. Well, that's the point in time where the account balance that you have saved, and let's call it your old employer plan, because you just left there and you're going somewhere else, becomes available for a distribution. And so there's a heavy influence of behavioral finance that happens at this moment in time. They call it the inflection point or something like that, when you look at Kahneman and those type of behavioral researchers.
Spencer: But back to the point, if we look across all account balances, about three out of every 10 are cashing out, okay? When they change jobs, and you say, is that a big problem, okay? Well, the Employee Benefit Research Institute has really tightly quantified this, and so here's the math, if you stopped all cash-outs at the time of job change, Rick, you would add $2 trillion in today's dollars, okay? Not future value, today's dollars, you would add $2 trillion. So we have a, what? Six, seven trillion dollar 401(k) system right now. I have that about right, all right?
Spencer: Stopping all leakage, all cash-outs would add $2 trillion. So, two over seven, what's that? That's like a 25, 30% bump in retirement savings immediately. So when you look at the magnitude of that problem, you say, whoa, we need to address leakage. Don't know if we can get it all stopped, okay? But every dollar that we stop is obviously an extremely valuable dollar in the future. And now, here's the real kicker. People say, why are you so focused on these less than $5,000 accounts? And the answer is that 1.5 trillion of that $2 trillion leakage number I just gave you would come back into the system if you just stopped leakage for less than $5,000 accounts. It's the biggest pot available.
Rick: And one of my favorite terms out there, leakage. I still don't know how we didn't get a better term to define that, but how are you defining that, for maybe someone that was hearing that for the first time, or maybe someone that is cringing, after hearing that? What do you actually mean by leakage?
Spencer: Yeah, so there's actually three forms of leakage, okay? And these are well defined. So leakage is money that is saved, but exits the retirement system prematurely, i.e., it's not being held to the point of retirement. So the three forms of leakage are, cash-outs at the time of job change, loan forfeitures, right? So I change a job and I don't pay back my loan, okay? And then the third one is hardship withdrawals.
Spencer: When you stack those, and again, the Employee Benefit Research Institute is our source for this, when you stack those, somewhere between 80 and 90% of all the leakage is due to cash-outs at the time of job change. It's not loan forfeitures or hardship withdrawals. So again, why do you attack that problem? Because, what was that Dillinger expression? It's where the money is?
Rick: Right, and when you say loan forfeitures, it's not the act of someone taking a loan, it's someone who's taken a loan, and then either changes jobs, stops paying it, somehow, some way their loan balances getting distributed now as taxable income. Did I over complicate that or was that?
Spencer: No, no, that's exactly right. It's almost always at the time of a job change, right? And the individual doesn't have the sort of cash on hand to pay back the loan, which is no surprise, right? But they have a loan, they've borrowed the money for a reason. So it's really a deemed distribution at that point in time, right? So whatever is unpaid, employer closes the account, and that money is called a distribution to the individual and then they get taxed on it.
Rick: Yeah, and then with hardships. Obviously, there's some very specific reasons, which I know some of, I don't know all of. So I'm not going to put myself on the spot to try to articulate those right now. But I guess one thing that's interesting is we talked about this trend and this leakage problem and kind of the auto portability thing of keeping money in the system. It seems like maybe we went the other way with hardship distributions where they were given a little bit of a shot in the arm in terms of how much money people can take out in a hardship and things like that. I don't know, that was kind of my perception. I mean, I know you're really close to this whole leakage concept, so am I looking at that wrong? Or is there may be some other logic being used that apply to some of the recent updates to the hardship provisions?
Spencer: Yeah, it got a little easier to take a hardship withdrawal. And you could kind of look at that, and like many things in life, you got to try to weigh the pros and the cons. One of the great attributes of our retirement system is its flexibility. It adapts over time, okay? You could even look at target-date funds, it was a great example of a massive innovation that hit the industry and then auto enrollment a little more recently. What would happen to hardship withdrawals was a tweak. I think the jury's still out. I've seen preliminary data, but none of it hits the scale of cash-outs at the time of job change in terms of our people taking more money out or less money out.
Spencer: Cash-outs at the kind of job changes dwarf all the other activity. So a small tweak but not fatal harm, okay?
Rick: Got it. Cash-outs are still the 800 pound gorilla in the room.
Rick: And I guess let me get you the wax philosophical here for a second, I'm planning some episodes for the new year and just with the new year, the new decade. I'm going to try to have a couple bigger picture conversations around, just whether it's the retirement system or whatever it might be. But, I mean, what's your thought on where we are as an industry in helping employees on their journey to retirement? I mean, I know we're going to talk a lot about some stuff with auto portability. But, I mean, are those kind of little tweaks to improve? Are we doing a good job? Are we failing? What's your sense when you wake up in the morning or when you look at just bigger picture stuff on how this whole thing is going?
Spencer: Yeah, first of all, I'm a glass half full guy, I have been my whole life and I've been in the retirement arena for going on, I don't, 25 or 30 years now. What's that count? Okay. I see improvement, okay? I see lots of improvement and I just looked at the dollars saved, okay? So the glass half full is that particularly for individuals who get serious about saving for retirement and take advantage of the system, it's working, okay? Now, that's not to say that, we've arrived at Nirvana because we're a long way from that.
Spencer: We have cash leakage, okay? We have seriously undersaved populations, okay? Demographics, and we have to work on that, okay? But, when we sort of left the three legged system behind, and we didn't have defined benefit plans, which by the way, are one of those stories that is, since you asked me to wax philosophical, the actual incidence of pensions is way less than you would be led to believe if you read the popular press about their disappearance and the demise of the pension, okay? But let's set that aside.
Spencer: Just look at the aggregate savings, and you say, we as a nation, even as an economy are benefiting significantly from this retirement saving system because those dollars don't sit in gold coins under someone's mattress. Those dollars make their way through the stock market, they make their way through the bond markets, they're put back to work, and so the multiplier effect of our savings system even moves beyond the actual dollars that people are saving for retirement.
Spencer: I was struck, if you don't mind since you asked me to wax philosophical, one of the most interesting pieces of research that EBRI publishes is one called Consistent Participation, okay? So this actually kind of takes your broad question and takes it down to an individual level. And what EBRI analyzed in their massive database was, how do consistent participants measure against those that are in and out of the system over time, okay? So they have a pretty good sized sample of consistent participants, and it was unbelievable, Rick. It was unbelievable. It was three or four times the account balances of the consistent participants.
Spencer: So, they sort of followed the old rule, set it and forget it, right? Now, we don't really want people to set it and forget it, but they said it, and they set it at the right level, and then they just stayed in the system for 20 or 30 years. Their retirement savings, their retirement readiness, their financial wellness, pick your term of art, okay? Was three to four, five times the level. So, first of all, there's a proof point that the system works, okay? So let's use that as our model. Now, what can we do to make everyone look like that, you know?
Rick: Yep. So I guess that's a great dovetail to what's going on with auto portability? How is that coming along? There's a lot of different ways we can go. But what's the current state of affairs?
Spencer: Yeah, let me give that to you in maybe two important chapters, because since we last spoke, there has been massive progress in auto portability, and the most important progress, I just have to go back and give a little history lesson. The history lesson here that I'm referencing is that all the way back in 2014, we Retirement Clearinghouse got together with a group of six of the largest record keepers in the country and exposed the idea of auto portability. And unanimously, those record keepers, and I mean, the biggest of the bigs, okay? I won't name names, okay? But they're all in the top 10. They said, "We like this concept. We like it because it's pro-savings. We like it because of its auto features." Right?
Spencer: We all think about auto enrollment, we'll come back to that in a bit. "Here's our issue. We would like you to get legal guidance from the Department of Labor that makes sure and clarifies and states that plan sponsors in particular are not taking on any new legal liability for engaging in this." Because we live in this litigious world, Rick, right? You can't read a story online in our industry without finding yet another lawsuit over something or other, right? So we said, "Okay, all right." Fast forward to November of 2018. Last year, the Department of Labor issued the first of two pieces of guidance that we requested. Now they did it a little differently than we requested it but that's not material. So in November of 18, they issued an advisory opinion, which is the important document for the plan sponsor, okay?
Spencer: It says, "You, plan sponsor, you are not a fiduciary." Right? "If an account is rolled into an active participant account in your plan, you weren't a fiduciary in making that decision." Okay? The advisory opinion went one step further and said, "Hey, you, Retirement Clearinghouse, you are a fiduciary." All right? "So if you don't get the affirmative consent from a participant, we understand that you're going to make an election, or direction to move that account to the individuals, active employer plan, you're a fiduciary in that act." We said, "Fine, we had no problem with that from the beginning."
Spencer: Fast forward again to July 31st of this year. So this is current, Rick, okay? On July 31st of this year, the department gave us the second piece of guidance, which is, this is more about Retirement Clearinghouse, but there's some important parts to it. They issued a prohibited transaction exemption to Retirement Clearinghouse that exempted us from fiduciary liability when we made that decision to move that small account into the active participant current employer's plan, okay? So at this point in time, all the legal guidance is in place.
Spencer: So this is less than 120 days old, okay? And this is kind of brand new. The advisor opinion was great, but we needed both opinions, right? Both documents to make this work. The exemption, the PTE, Prohibited Transaction Exemption, also serve to put consumer guardrails or protections around auto portability. And these are important too. My funny way of telling this story is there are 26 letters in the alphabet and the department used 25 of those to prescribe terms and conditions under which auto portability could be executed. So for example, right? There's a series of notices that have to be given to an individual, right? Well, that makes sense. That's disclosure. That disclosure that we're all familiar with, but how does it apply specifically to auto portability?
Spencer: They went so far as to outline the fee structure, okay? So a bunch of things like that. They instituted a requirement or put in place a requirement for a fiduciary audit of the program, and that audit would be a matter of public record at the department, right? So when we get this thing up and running, there'll be a public report that says, "Here's what's going on." So that's part one is the legal guidance is in place, and that's as of July 31st, 2019. That in turn triggered very strong re-engagement by the record keepers, okay? So if you think about auto portability, it actually needs to be adopted by a plan sponsor, okay? It's a plan design service, okay? You have to amend your plan to adopt auto portability. But you can't get there unless the infrastructure is in place at the record keeper, all right?
Spencer: So it was the first critical step is for us, Retirement Clearinghouse, to work with the record keepers to put the data exchange, file exchange, security protocols, all of those things that are sort of required in our industry to deliver a safe sound service. We've got to get all of that infrastructure in place. The good news is that we have at this point six record keepers, all of whom are in the top 12 or so in terms of ranking size of record keepers, who are actively engaged.
Rick: And as you're describing this and some of the things that came along with it, I guess I have to go back to 2006, and some of the changes that came in at that point, which really popularized automatic enrollment and target-date funds and all that. I mean, I know we're talking about a different portion of the conversation, obviously, that was more focused on the savings and the investment portion of the conversation. This is focused more on the, let's call it the continuity and the preservation side of the conversation, but maybe it's just because you're such a good communicator, but as you were talking through that, I'm like, gosh, I mean, this seems really, really significant and could have, as we look out into the next decade could be one of the more significant trends that plan sponsors are talking about.
Spencer: Oh, we think so. If you go back to our opening discussion, Rick, and you think about the leakage, cash-out a time of job change, and three out of every 10 accounts, all accounts are being cashed out of the system, and we retain those, and we put $2 trillion back in. This has the potential, auto portability has the potential to have an impact. I don't know if I could rank it next to auto enrollment, but it's kind of like that, Rick.
Rick: I'm with you, and that's kind of, as I was thinking about it, order of magnitude, okay? Maybe it's not quite that grandiose, but it's certainly a related cousin, you know?
Spencer: It is.
Rick: As you're thinking about that.
Spencer: It has a dimension to it, that is different than the last time around, and that's why it just takes time. If you think about auto enrollment, you have the same requirement for a plan sponsor to be able to adopt it. Well, that's a plan provision. We can change the plan provision, but we had to have the record keeping infrastructure in place to be able to accommodate that, right? Okay, that didn't take too long, because our record keeper only had to change their system for all of their clients, right? And we had this nice trend of plan sponsors adopting auto enrollment and off we went, but it was one plan sponsor to their record keeper.
Spencer: The different dimension about auto portability is that and this kind of our role, it requires a utility sort of in between the record keepers to facilitate the transactions. Ultimately, the money moves from one plan to a worker's new employer plan, all right? And of course, the way our system works that is really from the record keeper, A, to director keeper, B. So the infrastructure that we have to put in is, in a sense, it's more complex, okay? It's not complex infrastructure, it's just the number of players involved to optimize that type of an exchange or portability mechanism, right?
Spencer: It's not one record keeper building the technology. Each record keeper has to build the technology and kind of join into the, we think of it as a network, right? And it is, right? It's a network, sort of a hub and spoke network that allows each of the record keepers to plug into the hub and then get the benefit, of course for their plan sponsors who are doing it for their participants, but each record keeper that plugs in now gets the benefit of all the other record keepers that have already plugged in, all right? So this is new for the retirement system in terms of how you get it up and running,
Rick: And before we keep going down the auto portability path, one maybe point of distinction or clarification that I wanted to just ask you for is, today under current practice, I guess a lot of plans have auto rollover or auto cash-out policies in place. How does that differ from auto portability and maybe define a little bit of what I just said there?
Spencer: Yeah, yeah. Okay. So let's make sure we have a good understanding of current practice. As you described, current practice, auto rollover, there's about six names for the same thing, right? But let's call it auto rollover.
Rick: I'm like leakage.
Spencer: De Minimis Distribution. It's crazy. But anyway, today, a plan can adopt a provision that says, "If one of my participants terminates their employment and therefore their participation in the plan, that after appropriate notification and waiting period, giving the individual the opportunity to take action. If they don't take action, I can automatically roll that money out of the plan into what's called a Safe Harbor IRA." So that's current practice, all right? What auto portability does is it actually builds on that. It's a little like Judo, right? Where you use your opponent's weight and force to change who's on top in the Judo match, right? Auto portability builds on that existing practice. It doesn't replace it, okay? It builds on it.
Spencer: It says, "And when that account gets into the Safe Harbor IRA, we're not going to stop there. We set up this network where we've got record keepers participating around our hub and spoke. We're going to take an identifier for that individual who's in that Safe Harbor IRA. Got rolled out of their old employer plan, and we're going to send that through the system." Kind of like a submarine pinging for underwater objects, right? "And we're going to send it to all the participating record keepers with a single objective. That single objective is to find that individual's new employer plan, and when we find it, we're going to close the Safe Harbor IRA. After we notify the individual, we give them an opportunity to provide affirmative consent."
Spencer: Some will, in fact, we have some stats that are showing right now about 20% of our participants who are in our pilot for auto portability are responding and giving us their consent, but either way, affirmative consent or negative consent, which I described earlier, we're going to close that Safe Harbor IRA account and move the money to the new employer plan. So think about auto portability as an additional feature to an existing practice. Kind of like auto enrollment, right?
Spencer: Auto enrollment didn't invent enrollment. It changed the default decision from an opt in, to an opt out, and when we did that for auto enrollment, we saw participation rates. So I think I read something yesterday that said that they doubled, okay? Wow, that's pretty impressive. Okay? Participation rates. But let's just say they went up 50%. Now we have 85, 90% enrollments. Simply by changing the default. Auto portability does the exact same thing.
Rick: So let me without getting into the technology piece, because I'll get over my skis very quickly on that. So maybe we put that piece of the conversation aside, but to make this work, if I'm thinking about this, so we have Jane, who terminates, she has $4,000 in her 401(k) that gets rolled into an auto-IRA or a Safe Harbor IRA, because Jane didn't opt out of that process, didn't respond to any of the notices, didn't say "No, please don't do that. I'm going to do something else."
Rick: So her money gets moved out of her old employers plan into a Safe Harbor IRA. She gets picked up in the system, so to speak, and her new employer, and their plan is identified after a period of time and notices Jane's $4,000 or maybe slightly more, now gets moved to her new employer's 401(k) plan, have I got that right so far?
Spencer: That's exactly correct.
Rick: Okay. So if I'm thinking about this from the employer perspective, does old employer and new employer both have to have some type of auto portability provisions within their plan?
Rick: Or I guess how does that piece of it work?
Spencer: So now we go back to why record keepers are so important to this innovation, okay? The answer to your question is yes, both employers have to have adopted an auto portability previous in their plan, all right? And this is actually, if you start putting on your fiduciary hat, you'll see, oh, this makes sense to me, right?
Spencer: So, first, I'm the old employer, right? And I'm the one in a position, but I've already adopted an automatic rollover program, and so I'm adding this feature, which is a benefit to Jane, right? Because it's going to get Jane's money out of the Safe Harbor IRA, where she's been charged fees, whereby regulation she can only be invested in a money market product, okay? And where every few months, it's like dangling dollar bills in front of a participant. So a really bad idea, okay? Which is I can get easy access to that money.
Spencer: By the way, this is purely voluntary on Jane's part. Yes, it's a default but Jane has the ability to opt out of this system whenever she wants. She does not have to do auto portability. But as an employer, I set up a retirement savings plan, I got Jane to save 4000 bucks. I don't want to see her mess her retirement up. I'm adding this feature. Same thing's true on the receiving it, right? The new employer has to have agreed, because they have a role as well. Their role is they have to allow the record keeper to locate Jane's new account, right?
Spencer: We at Retirement Clearinghouse, we're going to send a record. Let's just use Vanguard. We're going to send a record about Jane's record to Vanguard every once in a while and say, "Hey, Vanguard, do you have a new active employer plan for Jane?" And when it shows up, that triggers the ability to move the money from the Safe Harbor IRA into the new employer plan. So the new employer has to have adopted the auto portability provision as well.
Rick: Got it. So, for this to gain scale or momentum in terms of changing current practices there needs to be adoption, basically on a wide basis because if one plan has auto portability and the other doesn't, maybe whatever order you want to pick there, it doesn't work. It's got to be a two way street.
Spencer: It needs to be a two way street. And of course the outcomes are optimized at the highest level of participation, right? Whatever that turns out to be. But I could give you some stats that your audience might find interesting because auto portability has actually been live for two years. Would you like me to describe what's going on?
Rick: I'd love to.
Spencer: It's fascinating, so I cannot name the client, okay? But if you read enough of our published and blogs and things like that, it's a large employer in the hospital services industry, they have 250,000 employees. You may not know that hospital services is a high turnover industry-
Spencer: ... Okay? They are. Okay, so this employer who has, we've been working with them for a dozen years now said, "Yeah, when we'd be happy to kind of be the pilot for auto portability." So here's how it's working today. We, Retirement Clearinghouse, are in the Safe Harbor IRA business. We've been doing this for 15 years, right? Meaning Jane when she left her plan and didn't make an election ended up in a Safe Harbor IRA. Well, I've got a couple hundred thousand of those and I've got 25,000 employer clients that keep sending them to me, okay? But the hospital services company said, "We will allow you to locate and match any Safe Harbor IRA account that you have against our active participant population with one critical qualification, when you find someone you have to get their affirmative consent in order to close the Safe Harbor IRA and move the money into this hospital services company plan." Got it? Okay.
Spencer: So it's one company with 250,000 employees. In two years, we have had close to 8000 matches, and we're actually kind of small player in the Safe Harbor IRA business. You wouldn't even find us on the map relative to Fidelity, okay? But we do very well. So this is what's really been interesting, Rick, is we then go out to those 8000 people and we communicate to them by snail mail, we send them a letter, okay? It's all we got right now, all right?
Spencer: 22% of those people have given us permission to close the Safe Harbor IRA and move the money into their new employer plan. We had a 22% response rate.
Rick: That's pretty impressive in terms of mailing response.
Spencer: It's a no brainer for the individual. And yes, we charge a fee, okay? And we disclose it and we tell everybody, we're charging the fee. And people say, "Ah, this is why it's just like auto enrollment. You'll do that for me. I have no problem paying a fee if you'll do that for me, right?" And bada bing, and there they are, and that money gets into the plan, it's now invested better. They've reduced their fee structure, all those good things.
Rick: Yeah, and I think that's an important clarifier there, because I think not everyone understands this. And you mentioned it earlier that the default position in a Safe Harbor IRA is cash, money market. Something that doesn't have a tremendous amount of yield or upside component to it. Whereas I think the connection you're drawing here is that, as that money gets moved out of a Safe Harbor IRA, which is probably going to mean cash, no one's done anything else to invest it, it's going to move into the new plan and likely be defaulted into a target-date fund or whatever their default investment option that the plan is chosen, and coincidentally and maybe a little disjointedly, cash is not a approved default or qualified default investment alternative in retirement plans.
Spencer: That's exactly correct. So by regulation, a Safe Harbor IRA can only be invested in a principal protected product so that's a mutual fund money market fund, or a bank deposit. That's really what it boils down to. Well, yields on those are what? Half a percent, three quarters of a percent. So the faster you can move the money through the Safe Harbor IRA, and you're exactly right about the destination, because if you think of the facts and circumstances as to where the account is going, right? It's going to an active account, which means the individual has joined the plan, has started deferring and either made an investment election or allowed the key DIA to kick in.
Spencer: So virtually 100% of the time, the participant is now in an appropriate long-term investment vehicle in their plan, in addition to the convenience of, okay, now all my savings is in one place and I'm not paying an additional fee for that Safe Harbor IRA. It's a no brainer at a certain level. And to the Department of Labor's credit, I just want to come back and say this, they got all of that, okay? So when I joke about them using 25 letters of the alphabet, they're just making sure as they should, that their consumer protection's in place so that nefarious deeds cannot take place.
Rick: No, I'm with you.
Rick: And since you brought up the fiduciary side of it, what are some of the fiduciary risks or challenges maybe that exists today with employees that are terminating and have balances in 401(k) plans, other workplace retirement plans? What does that look like?
Spencer: I worry about that a lot. So I'll just kind of spit ball here for a second, Rick, okay? And I want to separate out my auto portability and the self interest of getting that going, but let's just look at terminated people that stay behind in the plan, right? So there's a couple of categories of fiduciary exposure that plan sponsors should be thinking about, okay? One of them is, when that individual moved their residence, did they update that address with me? Because if they didn't, now I'm in one of these gray areas, where they had a responsibility to update it. But my required communications about the plan and changes and things like that are not getting to them, okay? And I may or may not know that, okay?
Spencer: I may know it if I get a piece of returned mail, okay? It's a bit unfair, to be honest with you. It's sort of a human level for the plan sponsor to get put in that conundrum, right? It was the individual that changed their address, the plan sponsor didn't change his address, but if you think about some more circumstances around that, that it all has to do with kind of the Department of Labor's primary theme around the missing participant, which is, these plans exists for benefits to get paid, okay? So let's think about some other circumstances.
Spencer: Well, companies get bought and sold all day long, right? Divisions of companies get bought and sold all day long. And so there's a whole nother side to the missing participant problem that isn't the participants fault, okay? And I can't tell you how many times we've had individuals that we counsel, we try to help them consolidate their money and do things like that in their current employer plan, and we literally have to ask them questions like, "Well, did you work anywhere else in your life?" To get them to actually think about, and the number of times that individual said, "Oh, my gosh, you're right when I was 25, I worked for General Electric, down in Greenville, South Carolina, and I was there for six years. I know I was in a plan." But they'd lost track of it, right?
Spencer: A piece of mail didn't get to them. They moved, whatever happened. I hate to say its uncharted territory, but it is kind of legally uncharted, okay? So there's clearly reasons to keep participants in plans. I mean, the benefit of keeping that person invested and consistently invested. It's just sort of self evident. But life has a funny way of changing, right? Plans have a funny way of changing. What happens when you want to change the default investment election? Did that notice get off to that participant? Did they do anything? Who has the liability for that? It gets kind of swampy in there.
Rick: No, I'm with you, and I feel like in terms of areas of interest that people are talking about, or attorneys or counseling people to think about in their fiduciary process, I feel like missing participants is one of those that's pretty high up on the list these days of, hey, from a fiduciary process or risk management standpoint, make sure you've got a good way to manage or keep up with what's going on with your missing participants.
Spencer: Yeah, and just like everything else that has the fiduciary umbrella over it, document the heck out of that process, all right? So I'll give you a little history here. I mentioned earlier that we've been in the automatic rollover business for a long time. We've actually been in the missing participant business long before it got to Broadway so to speak, okay? And the reason was fairly simple was, we'd get all of these accounts and we get tons of returned mail. So we were getting bad addresses and stuff from those 25,000 odd employers that we do business with. So we said, "We got to fix this. This is crazy."
Spencer: So we actually instituted a process that is now called, eSearch, back in the day it wasn't. This was a decade ago. Now we've done this like a million times where virtually every record that comes in here, we scrub it, and see first, is it a good address? Is it a mailable address? Second, do we have any national change of address information? Third, if we go out and use some of the big databases, is there a better address available? That type of work.
Spencer: So in any case, what's happened recently with all of the Department of Labor audit activity, is it's done what a regulatory agency is supposed to do. It's certainly heightened awareness. But what we've seen coming back from plan sponsors now who buy the service from us, is they're actually asking for certification of the process at an individual level. So it's kind of like, ah, this acts, looks acts and smells like a fiduciary decision the plan sponsors are now making and I think it's actually pretty well structured and well informed.
Spencer: So, we have a series of things that we do depending on the quality of the data that we get or find in the process. But at the end of it now, the plan sponsor's asking for documentation, which I think just makes a ton of sense.
Rick: Yeah, I'm with you there. I want to take you down one more philosophical path. But before I do that, is there anything that we've missed in the, I guess, maybe the nuts and bolts, conversation around auto portability, benefits, how it works, et cetera?
Spencer: I think we've covered the waterfront, the key concepts to get ahold of are, it's an addition, it's an enhancement to an automatic rollover process, it has the legal framework around it that not only protects the consumer but protects the plan sponsor, and allows for default position. It's got the technology and all the security and privacy and all of those things are critical because it's executed through the network of record keepers, right?
Spencer: So all the requirements that plan sponsors place on them are obviously applicable to this system. And then last but not least, your point about adoption. At this point we're tracking to about a year from now, we will have what we call a critical mass group of record keepers, call it four or five or six large record keepers that have implemented the technology that then of course, enables a plan sponsor to adopt. So, it's a long haul, it's a long road that we're traveling here, but I think we're pretty well positioned to start seeing significant volume in early 2021. That's what it looks like.
Rick: And as crazy as it sounds, that's right around the corner.
Spencer: It is just around the corner in our industry, Rick, it's like yesterday, right?
Rick: I know, right. Okay, so a couple philosophical questions here before we wrap up. A couple of weeks ago, I had a really good conversation with Josh Dietch over at T. Rowe Price.
Spencer: Oh, sure.
Rick: They just put out a great paper on sort of the long term impacts of automatic enrollment, and there was some really interesting findings in that. But any who I guess the point of my question here, is that as we think about automatic enrollment, automatic investment defaults. Now we have this kind of auto portability concept. Where does that fit in the retirement preparation arc or narrative? I mean, from your perspective, if people just kind of go along with what employers are setting as defaults and things like that, are we taking a lot of the decision making, a lot of the variability out of this and putting people on a better path, or are we sort of doing a lot of this to try to help protect people from themselves and hopefully the people will turn around and say, "Well, thank you." 20, 30, 40 years down the road?
Rick: I don't know if there's a great question in there, but just something I've been thinking about, as the industry spent such a long time trying to educate, and I don't know that that really worked. But it seems like now we have more and more framework to help protect people from themselves versus maybe the other approach.
Spencer: It is a good question. Rick, because I think, go back to part of our opening conversation. One of your questions was, is this system working? And I said, "In my 30 years, I have watched this system improve, piece by piece by piece and the results are manifest. They're there." All right? So you do want to be careful. We as Americans, we don't like mandates very much, okay? So you have to be careful that we don't cross a line. But to the extent that we're sort of putting in place, almost mechanical things that make it easier for an individual to participate and stay participating, I just can't see the downside of those.
Spencer: Again, TDFs was one. I've been doing this a long time and I'm really like, default funds. Okay, I am not an investment person. I'd be a terrible trader of stocks, okay? And then you think about auto enrollment. Now the bone that I pick with auto enrollment, that's not just my bone. T. Rowe's report said that, the same thing I'm going to say which is, we need to get those defaults nudged up, okay?
Spencer: Honestly, if you go back to what my grandmother said about her Christmas cookie jar, it was 10%. So when my grandfather came home, and handed her the cash, she'd take 10 cents on every dollar and put it in a cookie jar, okay? And it's kind of funny, we have a lot of sophisticated education and communication and all that kind of stuff, but I tell you what, if the average worker put away 10 cents on the dollar from the day they work to the day, they retired, they'd be just fine in retirement.
Spencer: So auto portability, when we hit on this notion, it was with those precedents in mind, what are the things that have worked, that will improve the system, okay? And that's all auto portability is, it's just another way to make the system better for people and easier. Nobody gets up in the morning and says, "Hey, I'm going to go roll my 401(k) over at my new employer plan." Nobody gets up to do that, okay? They get up to take the kids to school, they get up, my boss has to meet with me at 10 o'clock. They don't get up thinking about their 401(k) plan. So to the extent that we can give them a time dividend back, that's always good.
Rick: Yeah, and the way that I look at a lot of the auto features, and I think this also came out in the conversation with Josh, and the report from T. Rowe is, I feel like if people are utilizing the auto features, auto enrollment, auto investment, defaults, et cetera. Is it going to get someone all the way to where they need to be to meet their income needs in retirement? Probably not. But if they don't opt out, or if they don't do other things, then you know what, in their 20s, in their 30s, as they're going through these processes, getting automatically enrolled, maybe enrolling in plans, maybe it's not perfect, but they show up in their 20s or 30s, and all of a sudden, at some point in time, that light bulb goes off.
Rick: Usually for most people, the light bulb goes off at some point and says, "Okay, wow, I need to start thinking about retirement savings or retirement preparation or my path or whatever." And if it's, "Wow, well, you know what, I didn't realize this, but man, I've got $50,000, I've got $120,000." Whatever the number is, it's a lot better for that light bulb to go off with that type of pool of money, or some pool of money versus that light bulb going off and saying, "Man, I've done anything. And now the clock's ticking, and I've got 10 years or I've got 15 years." Or whatever it is, I don't know.
Rick: That's kind of my, as I look at defaults, again, are they the perfect solution? Are they the perfect answer? Like you said, are target-dates perfect? Are automatic enrollment percentages perfect? No, but they're certainly a lot better than the other side of the equation, which is not participating, not investing, et cetera.
Spencer: And It's kind of like our version of the Hippocratic Oath, Rick, "Do no harm."
Rick: And one last thing, I guess on the philosophical side of things, we've talked obviously a lot about the benefits and the possibilities that come with auto portability. I can't imagine that everyone is in unanimous support of this or that there's not some dissenting viewpoints. What have you heard? What do you see in terms of maybe the other side of the equation on why someone might not want to adopt or might not want to go down the path of auto portability in their plan?
Spencer: It's funny. We've been at this for quite a few years, as I articulated earlier in this discussion. There are very few people, very, very few people who are at least openly opposed to auto portability. And you can fit them into a couple of categories. One category is people who make a living, administering Safe Harbor IRAs, okay? And believe me, the large record keepers are not in that category, okay? They do it primarily as an accommodation for their plan sponsor clients, okay?
Spencer: So that would be one group of folks who would say, "You're impacting my business in a negative fashion." Okay?
Rick: Yeah, I can see that.
Spencer: There are a group of people who just think that participants should do the right thing every day all day, and I just can't find evidence of that. So in both cases, I think the answer is you design a program that has flexibility. It's the second time in this conversation, I've used that word, flexibility that allows an individual to opt out if they want to, okay? People do need access to emergency savings. We talked a bit about hardship withdrawals earlier and difficult as it might be, sometimes the 401(k) plan is the only pot of money, okay? And I would be the last person who would want to get in the way of someone trying to access their retirement savings for a sick child, okay? Or maybe even buying a house.
Spencer: I'm not here to judge anyone. What we're here to do is to put mechanisms and opportunities in place where it just makes it easier for someone to reap the benefits of the system, as opposed to having to work harder to get all those benefits. So not too many naysayers out there, at least not publicly.
Rick: That makes sense. So to the extent that someone who's listened to this wants to get more involved in the conversation about auto portability, whether that's an employer, whether that's someone in the retirement services community, are there ways that they can help? Are there ways that they can participate? Move this conversation further down the path? I guess what guidance or advice would you have for someone who wants to be part of the solution here?
Spencer: So there's absolutely something that every plan sponsor can do, okay? And that is weigh in with their record keeper, okay? Because as we described earlier, the best outcome for everyone is when everyone participates, okay? What a record keeper, they're business people too, okay? What they need to see is demand, okay? Now we've got a lot of demand and the group that I talked about earlier has done their assessments, they know the demand is there, and they're kind of on the innovative side. But to the extent that it's a truism, Rick, right?
Spencer: If your client asks you to do something, you're going to do it, particularly when it's to their economic benefit and to your economic benefit. So yes, now I don't expect there to be, it's not like people calling and wishing the White House Christmas greetings and phone banks explode, right? I don't expect that to happen. But to the extent that a plan sponsor listens to your podcast and says, "This makes sense to me." And they weigh in there with their record keeper, they've done their part and that'll just keep moving this forward, and the faster the better.
Rick: No, well said, and I will say that what we hear consistently from a lot of record keepers out there is that they are going to focus their investment dollars on systems and upgrades and new features based on what they're hearing in requests that they're getting from clients. So I would agree 100% and that truism thing, that's, I guess, preview for coming attractions. That's a big word of Rob Arnott, one of our prior guests as well. Who'll be joining us on the podcast in a couple weeks. So I will look forward to hearing some more of Rob's truisms as well.
Rick: Well, Spencer, this was a ton of fun. As always, I really appreciate everything you shared, I really appreciate all the hard work that you guys have put into auto portability, and until next time, I wish you guys all the best and would love to have the opportunity to catch up with you as we hit some more milestones in this process.
Spencer: Anytime, Rick, and thank you for having me again, and it's always fun to talk with you, it's always just great. Your questions are awesome, and as you can tell, we're excited about our little corner of the world. So thanks, much appreciated.