Beware of Auto-Portability Marketing

This is the second blog in a three-part series: The Truth About Auto-Portability. The first blog examined how auto-portability works and its value proposition. This second blog sheds light on the marketing propaganda used to promote auto-portability and how you should be cautious with their claims and alleged benefits.

Articles or marketing pieces supporting auto-portability appear to rely on two faulty strategies. Remove those misconceptions and you realize that auto-portability is not significantly better than existing automatic rollover IRA programs. Indeed, auto-portability’s value may not outweigh its costs as discussed in the first blog.

Let’s breakdown these marketing efforts and describe why they appear to be misaligned. The goal of this blog is to provide you clarity in how the auto-portability process works and for evaluating its benefits and costs. You are then in a better position to determine if auto-portability is right for you or your clients.

Ignoring Its Own Business Process

Auto-portability articles appear to be critical of existing automatic rollover IRA programs to support how much better auto-portability can be. They refer to existing or “traditional” automatic rollover IRA as programs which “wind up housing former participants in high-fee safe harbor IRA ‘landfills’ where their small balances languish.” This seems disingenuous as the auto-portability process must include an automatic rollover IRA program.

Former participants may still end up in a high-fee safe harbor IRA “landfill” by utilizing the auto-portability program. Auto-portability doesn’t resolve the issue because two out of the three steps involved in auto-portability are identical to existing automatic rollover IRA programs. An automatic rollover IRA must be utilized prior to auto-portability’s third step; money being sent to the “transfer-in” plan.

In an article listing the “4 compelling reasons” to adopt auto-portability, the second reason is that you act in the plan’s best interest by reducing the number of terminated small balance accounts and increasing average balances. These benefits are also achieved by existing automatic rollover IRA programs without auto-portability! You can achieve these benefits with a stand-alone automatic rollover IRA program and forgo the additional fees, notices and fiduciary liability of auto-portability.

Avoiding this “landfill” outcome isn’t solved with auto-portability. It requires the selection of a good automatic rollover IRA program – regardless of its connection with auto-portability. An upcoming blog will provide details on how to compare automatic rollover IRA programs to help you make the best selection.

Flawed Use of Survey Data

These marketing pieces use broad survey data to enhance the effect of auto-portability. However, the data is misleading because it encompasses the whole force-out process instead of focusing on the portions specifically related to auto-portability. One article argues auto-portability is better at preventing “cashout leakage” by using the following survey data about participants who are subject to a “traditional” automatic rollover process:

• 55% will quickly choose the easiest option, which is to cash out completely receiving no counseling to discourage this behavior and no assistance to move their retirement savings forward.
• 6% will proactively move their funds to another IRA or to a new employer’s plan.
• 39% do nothing, and have their balances forced out into an automatic rollover IRA, where only 1% bother to move out of the default fund.
• 6-12% of those in automatic rollover IRAs will cash out each year or will eventually allow fees to erode their balance to zero.

The article’s inference is that auto-portability would help all these participants. That’s not true. For the 55% who cash out completely, auto-portability does not help because the balances have not moved from the “transfer out” plan to an automatic rollover IRA first. Therefore, there is no balance to send to the “transfer-in” plan under auto-portability.

For the 6-12% who cash out or fee out each year, that will likely continue to occur because auto-portability takes time to identify a new employer’s plan and notify the individual. That process can take several months and does not begin until the individual meets the eligibility requirements of the new employer’s plan. At best, auto-portability is potentially helpful – if even relevant – to a fraction of participants subject to the automatic rollover process, whether traditional or through auto-portability.

Another article supporting auto-portability uses survey data showing that 41% “will cash out their 401(k) accounts after switching jobs and pay taxes and penalties as a result.” Auto-portability will not help that 41%. Those individuals never made it into an automatic rollover IRA which means auto-portability was unavailable to move the money from the automatic rollover IRA to the “transfer-in” plan. Beware of the surveys being used in articles supporting auto-portability as they may not be isolated to data relevant to the auto-portability process.

Be Careful When Considering Auto-Portability’s Marketing

In ignoring or hiding its own business model and using irrelevant survey data, those promoting auto-portability make it difficult to assess the pros and cons of auto-portability. Understanding how the auto-portability process truly works and how it can and cannot be effective allows you to make informed decisions.

Moreover, I agree with these marketing pieces that too many people are choosing the easiest option and cashing out completely when leaving an employer. But there are better alternatives than auto-portability to prevent or reduce this problem. The third and final blog will discuss those alternatives and how we, as a retirement plan community, can assist.

About the Author

Brian Furgala, Esq., CPC, QPA is Senior Director, Retirement Services Strategy for PenChecks, a leader in outsourced retirement plan distribution processing and Automatic Rollover/Missing Participant IRAs and related services. His broad experience as an ERISA attorney and senior executive for several leading retirement plan service providers gives him a unique perspective on the industry.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.