When a new employee joins a company and is automatically enrolled, he or she starts at the plan’s default deferral rate, which can be as low as 3%. The problem is that many new employees may have been at a much higher deferral rate at their previous jobs. Automatically putting participants into their new employers’ plans at a lower default rate could cause significant and long-term damage to their efforts to save for retirement.
The vast majority of new employees are not new to the DC system. With the DC plan becoming the hub for savings and retirement planning for a growing number of American workers, it only makes sense to create a profile for each participant — at the very least, in order to preserve deferral rates.
Going further, portable profiles could be used to consolidate other DC and IRA accounts to help participants see and manage all of their retirement savings, and to enable their plan advisor serve them better. Arguably, the investment options and fees in DC plans are better than most IRA options. And with pending DOL regs likely limiting access to advice, the DC plan might be the best option.
And even if a participant leaves a big company whose fees and investments may be better than a smaller firm’s, at least the profile and accounts could be linked, preserving participants’ deferral rates. If technology can tell which websites I have visited and track my buying preferences, it's hard to believe that record keepers can't create and share participant profiles. Yes, privacy and compliance issues need to be addressed, but let’s not let them be an excuse for not doing the right thing.
