The impact ofauto-portability was particularly impressive among the lowestincome quartile. (Photo: Shutterstock)

The Employee Benefits Research Institute (EBRI) has added yetanother study to a growing body of research supporting thesubstantial retirement savings public policy benefits of auto-portability.

EBRI Issue Brief no. 473, by research directorJack VanDerhei, Ph.D., compared the outcomes of participants in401(k) defined contribution plans with auto-enrollment againstdefined benefit (DB) plans.

While the primary objective of EBRI's research was to address agrowing public policy concern over the relative decline of DBplans, this study also evaluated the significant, positive impactthat auto-portability could have upon the retirement security of Americans whoparticipate in 401(k) plans.

Comparing DB vs. DC plans with auto-enrollment

In the latest analysis, EBRI specifically examined the amount ofretirement income that could be produced by auto-enrollment 401(k)plans and then determined the final-average DB accrual raterequired to generate an equivalent retirement income.

Under a baseline set of assumptions, which included historicalrates of return and annuity purchase prices reflecting average1986-2013 bond rates, auto-enrollment 401(k) plans fared quite wellagainst their DB counterparts.

In the baseline, EBRI found that few scenarios yielded resultswhere the equivalent DB accrual rate was under 1.5%.  Inother words, DB plans would typically have to accrue atmore-generous rates to “break-even” with auto-enrollment 401(k)plans.

However, when EBRI applied various “stress tests” by reducingrates of return, or by utilizing current annuity prices,auto-enrollment 401(k) plans lost their comparative advantage to DBplans.

Auto-portability: The Great Equalizer

When EBRI's equivalence comparisons incorporated auto-portability, which reduces plan leakage fromcashouts, auto-enrollment 401(k) plans delivered substantiallybetter results.

Pairing auto-enrollment 401(k) plans withauto-portability resulted in DB plans having to providefar more generous accrual rates to achieve equivalence vs.baseline.

The impact of auto-portability was particularly impressive amongthe lowest income quartile, “given their lower account balances andthe negative correlation between account balances and cashoutactivity.”

Additionally, EBRI found auto-portability's results to be“dramatic for males in the lowest income quartile with only 11-20years of plan eligibility” requiring a 3.1% DB accrual rate toreach equivalency, an increase of 82% over the baseline accrualrate of 1.7%.

Extending the DB vs. DC plan comparisons to millennials

On 2/14/19, as a follow-on to its initial analysis, EBRIreleased an infographic – How Will Young Millennials Fare With DefinedContribution vs. Defined Benefit Plans? – revealing thebeneficial effect of auto-portability on millennials.

When auto-portability was added to 401(k) plans, millennials —both male and female, for all years of eligibility, and for allincome quartiles — experienced dramatic improvements in 401(k) planperformance vs. baseline, as measured by break-even DB plan accrualrates.

The growing body of research supporting auto-portability

This analysis adds to a growing body of research from EBRIdemonstrating that auto-portability, by reducing cashout leakage,broadly increases retirement security and delivers significantbenefits for America's defined contribution system.

Previous EBRI analysis addressing the public policy benefits ofauto-portability includes the following:

• Standalone benefits of auto-portability (EBRI Issue Brief, no. 451- May 2018), estimatedto be between $1.5 and $2.0 trillion.
• Benefits of auto-portability, when combined with otherretirement savings public policy initiatives, such as the AutomaticRetirement Plan Act of 2017, or ARPA (EBRI Fast Facts – September 2018), whereauto-portability's impact reduced the $4.13 trillion retirementsavings shortfall by $645 billion, or 15.6%.
• Significant reductions in the retirement savings shortfall(RSS) for Generation X retirement savings shortfalls, by gender(EBRI Issue Brief, no. 471 – January 2019).

Tom Hawkins is Senior Vice President,Marketing & Research at Retirement Clearinghouse.