Simio Simulation shows effect of auto portability on retirement savings

Introduction

Retirement Clearinghouse, LLC is the leading independent provider of portability and consolidation services for defined contribution plans. Its integrated financial technology, data and information solutions facilitate automated consolidation of small, redundant accounts for sponsors to improve plan performance metrics, and enable participants, regardless of account balance, to seamlessly transport their retirement savings through every phase of their careers.

Retirement Clearinghouse works with more than 17,700 retirement plans and has helped guide over one million plan participants with more than $14.8 billion in retirement savings. Its portability solutions have been proven to cut cash-outs by over 50% and significantly increase average account balances.

The Challenge

Each year, an estimated six million Americans who change jobs have less than $5,000 in their retirement accounts. This segment of the mobile workforce often cashes out their retirement accounts, creating what the industry calls leakage. Retirement Clearinghouse sought to model the effect of this small balance leakage – as well as the effect of reducing it -- on plan sponsors, financial institutions and the industry as a whole.

“We wanted to model leakage because that’s the principle dynamic we seek to change through auto portability, which automates the process by which a consumer’s 401k account follows them from employer to employer when they change jobs,” says J. Spencer Williams, founder, president and CEO of Retirement Clearinghouse. “Our goal was to create a simulation that could dynamically illustrate in five minutes what was going to happen over an extended period of time, given the specific inputs of our customers. While we focused on those with small balances who cash out, we also needed to account for those who move their money to an IRA or to a 401k by themselves, because we really wanted to construct a complete picture of the retirement industry ecosystem. And because consumers’ decisions vary over time, we also needed to be able to dynamically model and illustrate a changing environment.”

The Approach

To create the simulation, Williams chose to partner with Ricki Ingalls of Diamond Head Associates. Ingalls used Simio to build a simulation model that mirrors the reality of the millions of annual decisions made by retirement accountholders, and then populated the simulation with comprehensive data supplied by the Employee Benefits Research Institute (EBRI).

“We’re really breaking new ground by using Simio discrete event simulation in the retirement industry,” Ingalls says. “The industry conducts big data analysis, and they use continuous simulation models that show rates of change over time. But neither of these can do what Simio discrete event simulation can. “

“Unlike other simulations, Simio allows us to look at processes,” he explains. “We had to account for three types of processes: The individual participants and the decisions they make, the cash transaction processes, and the information processes between companies. This allowed us to show how the market would change if auto portability were in wide use.”

The Results

Retirement Clearinghouse’s simulation model now has data from 26 independent companies, and is a powerful sales tool that Williams and his colleagues can use demonstrate leakage scenarios for each of those companies.

Retirement Clearinghouse also used the model to evaluate the industry as a whole. At a recent EBRI Policy Forum, Williams and Ingalls presented their simulation that showed how widespread adoption of seamless plan-to-plan transfers for small-balance accounts can significantly increase Americans' retirement prospects by retaining more savings in employer-sponsored plans.  If auto portability is widely adopted, within one generation small cash-outs could be reduced by two-thirds, from $7 billion annually to less than $2.5 billion annually. As a result, auto portability could generate more than $115 billion in new employer-plan savings for the current and next generation of plan participants.

Williams points out that Simio’s flexibility made it possible to extend the simulation beyond what he had initially intended. “Frankly, I’ve been stunned that every time we came up with a new question or level of complexity that we needed to account for in the simulation, the Simio software answered the bell and responded to our needs,” he says.

He cites the ability to run different scenarios and compare them as one example. “What does the world look like today? What will it look like tomorrow? Can we start from ten years ago? When I realized we could answer that, it was an epiphany,” he says.

 It also came as a pleasant surprise that the simulation could provide the foundation for sophisticated financial analysis. “I assumed that we would have to extract data from the simulation to put together a profit and loss statement for each potential customer,” he says. “I’ve done cost/benefit analysis my entire life with spreadsheets, and when I saw that Simio could do that for me, I literally saw hundreds of hours of work disappear. My first thought was, ‘this is like air travel vs. covered wagons.’”

Williams expects that Simio simulation will continue to serve a very practical need for Retirement Clearinghouse. “We are likely to continue building out a model of the entire mobile work force,” he says. “I can already feel the demand from the industry that says, ‘You’ve given me an answer that I didn’t expect. I want to know more.’  That will drive examination of the other segments of the industry. If we’re smart about this, we will be using this tool for a very long time.”