As defined contribution plans continue their bumpy yet amazing journey to replace defined benefit plans, operational issues, which have mostly been ignored, need to be addressed mainly to accommodate a mobile workforce.
DB plans work because participants must remain at their employer for 20 to 25 years. Even then there are issues finding them when they move or getting the plan sponsors to honor their commitment. The biggest issue is that employers carry the liability if there is not enough money in the plan to fulfill the promise, which is why they have pivoted to 401(k) and 403(b) plans.
Auto features have helped get employees into the plan, save more and invest in professionally managed investments—yet the question remains: how to embed a guaranteed stream of income.
Not yet addressed are the operational issues in DC plans, as workers change jobs 12 to 15 times in their careers, moving from one plan to another and causing leakage, lost or forgotten accounts and cash-outs. Some, like UCLA professor Shlomo Benartzi in a WSJ column, noted that the current DC system does not fit a mobile workforce and suggested we adopt an Australian-type system.
A bold and deep white paper by the Retirement Clearinghouse suggests that the system needs a centralized clearinghouse to address the issues, which include:
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The balkanization or fragmentation of the system, which requires separate entitles to work together. Every time a participant moves to another plan or rolls over into an IRA, there needs to be cooperation, which is in short supply.
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Job changes and, not mentioned, the ever-growing gig economy.
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Laws and regulations that do not require interconnectivity, especially problematic for smaller accounts.
The white paper advocates for a “radical system intervention” like a clearinghouse that addresses some of these issues, which it states should be, “an institutional, non-retail platform dedicated to advancing the standards, technology, and operational frameworks that underpin secure and efficient transactions, primarily between recordkeepers, and on behalf of their plan sponsor clients. The clearinghouse operates in the background, enabling data, exchange, settlement information, and digital payments without direct consumer interaction.”
The ideal plan has taught us that only an automated system works.
The proposed clearinghouse would be patterned after the Auto Portability Network started by RCH and run/owned by the record keeper members of the Portability Service Network described in the recent white paper as, “the first application of the clearinghouse model and addresses the loss and dispersion of small-balance accounts during job changes. Its standardized design provides an automated way to find, verify and move eligible accounts between record keepers.”
The PSN was a bold move by Spencer Williams, RCH’s CEO, and Robert Johnson, its owner, and founder of the Black Entertainment Network. Rather than try to get all of the record keepers to agree, which industry associations have unsuccessfully tried before, they started with one provider, Alight, which eventually expanded to Fidelity, Empower, TIAA, Vanguard and Principal. They focused on small accounts where leakage was greatest, which required auto-portability regulations. It “only” took 10 years
Now RCH is calling for an industry-wide clearinghouse that addresses the fundamental industry’s operational issues with a system that automatically follows and tracks a participant as they move from one job to another, as well as disparate providers safely and seamlessly transferring assets. This neutral, shared and unbiased platform intermediary among its members, who must agree to agree to standards, needs a digital platform that includes:
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Detailed APIs
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Standardized data formatting
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Membership requirements
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Transfer validation to track money movement with confirmation and reconciliation
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Reporting and analytics
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Cybersecurity
Along with addressing the $1 trillion moving annually from DC plans into IRAs, the clearinghouse could solve issues with the savers match, HSAs and PLESAs, along with auto-portability. The white paper explains further:
“A digital rollover framework built on a clearinghouse model would convert what is now a decentralized, DIY process into a standardized, automated transaction flow. Accountholder consent and instructions would be captured digitally, data would be validated in near real time, and funds would be moved electronically as instructed by the clearinghouse, between plans and between plans and IRAs, without the use of paper checks.”
The less than 5% of participants who have a personal financial advisor now enabled by third parties like Pontera that create and oversee customized retirement income plans do not have issues. But for the vast majority, radical intervention is needed.
This might seem like a pipedream to bring together disparate parties whose interests may not be aligned, requiring significant legal and regulatory changes, except that RCH has created the model with the PSN, which could serve as the foundation. In just two years, 20,000 plans have adopted the system, and record-keeper members account for the vast majority of DC participants in an industry that continues to consolidate.
The need for a centralized system grows as convergence of wealth and retirement at the workplace grows, requiring more data and services to be integrated, as does automatically embedded guaranteed income.
The other options include nationalizing the DC system, which would have its own issues and would be opposed by powerful sources, or moving to blockchain, which alleviates the need for a centralized system.
Doing nothing is not viable. The DC system continues to grow as the primary source of retirement income with $14 trillion in assets, 100 million active participants and 830,000 plans expected to explode, as well as $19 trillion in IRAs. The clearinghouse modeled in the RCH whitepaper seems to address many of the issues and is a call to action that the retirement industry can no longer ignore.
