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Practice Management

Consolidating retirement accounts using auto-portability can help protect data.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).
 

All companies that manage personal consumer data are already concerned—or should be concerned—about cybersecurity. The scope and scale of cyberattacks continue to rise worldwide, as demonstrated last year by a breach that compromised data of 50 million Facebook users.

Retirement plans pose a new risk. Lawmakers are keen to protect the personal information of defined contribution plan participants. Recently, Sen. Patty Murray (D.-Wash.) and Rep. Bobby Scott (D.-Va.) asked the U.S. Government Accountability Office to “examine the cybersecurity of the private retirement system.”

Fortunately for plan sponsors, record-keepers and other parties in the retirement services industry, the same solution designed to address the multiple problems stemming from the upsurge in small, stranded 401(k) accounts—auto-portability—can also augment existing practices that protect plan participants’ personal data.

Auto-portability is the routine, standardized, and automated transfer of a retirement plan participant’s 401(k) savings account from their former employer’s plan to an active account associated with their current job. This solution is underpinned by paired “locate” and “match” algorithms which work together to locate participants with multiple 401(k) plan accounts, confirm their identities, and obtain consent for rolling over their stranded accounts. These accounts can exist in former employer plans or rolled into safe harbor IRAs before they're moved into active accounts in their current employers’ plans. In addition, consolidation can include a roll-in to the participant’s current employer plan.

The act of consolidating accounts reduces the number of small accounts in the 401(k) system through auto-portability, which makes plan participant data more secure. Consolidating a participant’s multiple 401(k) accounts reduces the number of systems that store a participant’s data, and also encourages participants, sponsors and record-keepers to become more engaged when it comes to keeping track of accounts.

Auto-portability Meets Cybersecurity Best Practices
While there is currently no central legal framework regulating cybersecurity in the retirement services industry, the SPARK Institute, a retirement policy center in Simsbury, Connecticut, published a compilation of recommended cybersecurity best practices for retirement plan record-keepers in 2017.

Auto-portability, which went live that same year, operates in conformance to the SPARK Institute’s cybersecurity recommendations.

For example, the SPARK Institute issued 16 security control objectives, including the practice of encryption, which requires protection of both “data-in-motion and data at rest.” The institute suggests that the same data protection risk management standards be applied to suppliers. To address cybersecurity, the institute suggests these steps:

  • Encrypt all sensitive information subject to auto-portability using Advanced Encryption Standard 256-bit encryption, an industry standard developed by the National Institute of Standards and Technology. There is no known type of cyberattack that can read AES-encrypted data without having the cryptographic key.
  • Never combine a Social Security number with other personally identifiable information in any single file transfer. The objective should be to ensure there is never enough personal data in any single transmission for a hacker to use to steal an identity. In addition, any file with personal information should never include the identity of either the plan’s sponsor or the record keeper. That further thwarts a hacker from accessing an individual participant’s retirement account.
  • Know that auto-portability supports multiple methods of exchanging secure data.
  • Ensure that any information flagged during the locate-and-match process that doesn’t adhere to certain criteria requires additional verification to confirm an identity.
  • Conduct full address-location searches to ensure that the correct participant is found and properly matched to multiple accounts.

When participants strand 401(k) savings accounts in former-employer plans, and nothing is done to transport them to active accounts in their present employers’ plans, there’s a strong chance that the worker may fall victim to a cybercrime.

Plan sponsors can protect themselves and their participants from hackers, and strengthen their overall cybersecurity preparedness, by implementing auto-portability to cull small accounts and missing participants.

-by Spencer Williams
Spencer Williams is president and CEO of Retirement Clearinghouse.

NEW-Source-Media

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The information contained herein has been provided by sources other than Lord Abbett which are believed to be reliable; however Lord Abbett cannot guarantee the accuracy or completeness of this information.

A Safe Harbor IRA is a specialized individual retirement account (IRA), established when an employer's qualified retirement savings plan elects to “force out” their small-balance participants after they’ve separated employment. Plans that have adopted “automatic rollover” or force-out provisions will typically select a Safe Harbor IRA provider, which can be their current recordkeeper or a third-party Safe Harbor IRA provider.

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