What is synthetic tenure, and why is it important?
It is intuitive to observe that the easiest way for a plan participant to achieve lifetime participation in the U.S. retirement system is to work for the same employer for 40 years or more. But in today’s highly mobile workforce, that rarely happens. According to the Employee Benefit Research Institute, the average American will change jobs more than seven times during a 40-year working life, indicating that a participant’s average tenure with each employer will be a little over five years. So what can be done to help the vast majority of participants that simply won’t work for one employer for their entire careers?
A recent report from EBRI and the Investment Company Institute provides us with concrete answers. The study — “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Plan Account Balances, 2010-2014” — found that the median account balance for participants in the EBRI/ICI 401(k) database who made uninterrupted plan contributions from year-end 2010 through year-end 2014 was more than three times higher than the median account balance for all participants in the database.
This is where “synthetic tenure” comes into play. We think of synthetic tenure as consistent participation in more than one defined contribution plan across multiple job changes, with no interruptions or breaks in contributions or premature cash-outs, throughout a participant’s time in the workforce. Synthetic tenure is trackable, measurable and reportable for every participant, a “hard number” computed as the number of years of plan contributions — and employer matches — made and received by each participant. This number could, and should, be embedded in participants’ account data as their savings are transferred to their new-employer plans. From a retirement readiness standpoint, synthetic tenure is the next best thing to contributing to a single employer’s defined contribution plan for 40 years.
Diving a bit deeper into the EBRI/ICI research, the report also noted that participants with consistent 401(k) plan participation had longer tenure at year-end 2014 than the total number of participants in the EBRI/ICI database. There’s a catch, though — the EBRI/ICI database included 24.9 million 401(k) plan participants between year-end 2010 and year-end 2014, but only 8.8 million of them fell into the “consistent” sample, meaning that even over the relatively short period of the study, only 35% of participants realized the benefits of consistent participation. After extrapolating these results over an average 40-year retirement lifecycle for 60-plus million participants, we can confidently state that tens of millions of participants need additional solutions to replicate the results reported by the study.
Sponsors and plan providers should be asking themselves what they can do to replicate the benefits of consistent participation, while recognizing the highly mobile nature of today’s workforce. Creating synthetic tenure is the key. Sponsors and plan providers should take the lead in implementing programs that remove the frictions associated with account portability and facilitate plan-to-plan roll-ins, thus enabling retirement savings to follow participants as they change jobs. Broadly delivered, these solutions will create synthetic tenure and the positive benefits of consistent participation.
Providing portability solutions at the time of a participant’s job change is critical to achieving the desired results. According to the U.S. Government Accountability Office, approximately $74 billion in assets leave the retirement system every year, and 89% of this leakage is the result of cash-outs at the point of job change. And yet, the Plan Sponsor Council of America’s most recent annual study, published this past January, reported that 97.6% of defined contribution plans are capable of accepting roll-ins of retirement savings from other plans.
The vast majority of defined contribution plans have the tools in place to accept roll-ins of accounts from other plans for both new employees along with all active participants — and the majority of participants would take advantage of plan-to-plan portability if it was less expensive and time-consuming to complete a roll-in. A study of mobile workforce behaviors conducted by Boston Research Technologies and published last year found that 93% of participants consider roll-in assistance to be either “an excellent benefit” or “a good benefit” compared to other services — and 29% would be “very likely” and 34% would be “somewhat likely” to pay any cost for an employer-provided roll-in service in which a specialist would take care of most of the work.
In providing and promoting the use of portability solutions, sponsors and providers can help all participants achieve synthetic tenure, giving them the same chance to realize a financially secure retirement as those lucky few who still work for a single employer for their entire working lives. Synthetic tenure can be readily delivered to all participants by putting systems in place that facilitate seamless plan-to-plan portability, and auto portability for participants with 401(k) savings account balances below the automatic rollover limit, currently set at $5,000.
The point is this: It’s much easier than you think for sponsors and providers to put measures in place, either by themselves or with help from an external roll-in services provider, that enable participants to establish synthetic tenure as they move from job to job. Synthetic tenure not only improves participants’ chances of achieving a financially secure retirement, but also increases plans’ average account balances, making the facilitation of synthetic tenure “mission: critical” to all parties that have a role in our defined contribution system.
Spencer Williams is President and CEO of Retirement Clearinghouse, a portability solutions provider.