Record keepers launch auto-portability consortium to reduce plan leakage

Three of the nation's largest record keepers are teaming up with Retirement Clearinghouse LLC to launch an industry-led auto-portability consortium aimed at reducing plan leakage and improving retirement outcomes.

Fidelity Investments, Vanguard Group and Alight Solutions, in coordination with RCH, announced Wednesday the formation of the Portability Services Network. The consortium, which will launch in the first quarter of 2023, is designed to include up to three additional major record keepers as owners, though is open to all record keepers to connect.

J. Spencer Williams, founder, CEO and president of RCH, which has developed a service that helps automatically move participants' savings back into retirement plans at their new employers, referred in an interview to the consortium as an "industry utility" that "doesn't seek to make a profit," but instead "seeks to deliver economies of scale in the form of ever-lower prices to participants."

The record keepers that own or participate in the consortium will not receive any compensation for facilitating auto portability transactions from participants, according to a news release.

The consortium's main objective is to reduce plan leakage, Mr. Williams said. An estimated $92 billion in savings left the U.S. retirement system in 2015 because Americans who switched jobs prematurely cashed out their workplace retirement accounts and paid taxes and penalties on those cash-outs, according to Employee Benefit Research Institute data cited in the news release.

Plan sponsors are permitted by law to kick out small accounts with balances under $5,000 when workers leave by offering them an option to either cash out their balances or transfer the funds to an individual retirement account or the worker's new employer's plan. Participants who cash out their balances are taxed on their distributions and are hit with a 10% early withdrawal penalty if under the age of 59½. Those that transfer their funds to an IRA often wind up paying much higher fees than they were in their 401(k) plan. And if a participant doesn't make a choice, the plan sponsor can roll that money into an IRA for the participant or send the participant a check.

"So many of these workers — young, low-income, minorities, women — have been disadvantaged based on the structure of the system today where these … small accounts under $5,000 are pushed out of retirement plans," said Dave Gray, head of workplace retirement offerings and platforms at Fidelity, in an interview. "We think that's something we need to fix. And we recognize that no one provider can fix it alone. It can only really be fixed through 401(k) providers and record keepers coming together and doing it collectively."

Fidelity, Vanguard and Alight represent about 43.8 million workers across more than 48,000 employer-sponsored retirement plans. Mr. Williams said that number is about 40% of the market and allows the consortium to offer economies of scale. "With Alight, Vanguard and Fidelity locking arms and taking a unified message to their clients and the almost 44 million participants that they serve, we've got that critical mass," he added.

RCH currently charges participants a maximum one-time fee of $59; under the consortium, that fee will be $30 and will be reduced further as more record keepers join, Mr. Williams said.

Of note, Alight in 2020 announced that it would implement auto portability for its clients using RCH's platform and Vanguard did the same in 2021.

Two years after Alight's announcement, "Industry awareness and the momentum behind this vital solution have grown significantly, and we look forward to working with our fellow industry leaders to reduce our country's retirement-savings shortfall," Alison Borland, executive vice president of wealth solutions at Alight, said in the news release.

John James, managing director and head of Vanguard institutional investor group, said in the same release that "as an industry, we have a responsibility to American workers to remove barriers to retirement preparedness and increase their chances for investment success. The formation of this consortium directly complements Vanguard's ongoing efforts to simplify investing and drive positive participant outcomes."

Fidelity's Mr. Gray expects "that our clients are going to be quite thrilled with this approach. This is addressing an issue that they've long felt was an issue and just to date there wasn't a really good way of doing it until we could all come together as a consortium, and now we think this is the way to solve the problem."

Robert L. Johnson, founder and chairman of The RLJ Cos. and chairman of RCH, said in an interview that RCH has had conversations with other record keepers about joining the consortium and expects the number of participating firms to grow shortly. "If we come together, build scale, be innovative, work in the public interest at cost that's affordable, this is going to benefit the economy as a whole," he said.