By Neal Ringquist | November 5, 2020
On Wednesday, 11/4/20 the Broadcast Retirement Network’s Jeff Snyder interviewed Retirement Clearinghouse (RCH) President & CEO Spencer Williams and Alight Solutions’ Vice President & Head of Research Rob Austin to address the 401(k) system’s small account problem – where high levels of cashout leakage in small balance segments perennially robs millions of participants of a timely or comfortable retirement.
“Three Giant Forces” Driving Small Balance Cashouts
In the video, available on the Broadcast Retirement Network, Snyder leads off by delving into the drivers of cashout leakage for small balances. RCH’s Williams cites “three giant forces” that generate – and re-generate – cashout leakage every year. Topping Williams’ list is America’s mobile workforce, followed by automatic cashouts (for balances less than $1,000) and finally, high levels of systemic friction that prevent job-changing participants from easily moving their balances forward following a job change. Taken together, Williams observes that these factors drive high levels of cashouts and produce a defined contribution system “littered with small accounts.”
Alight Solutions’ Research
Snyder then turns to Alight’s Rob Austin to examine their new research (The impact of 401(k) cash-outs on retirement income), released in October. Overall, across all balances, Austin notes that 40% of separated participants cash out, but that figure surges to 80% when they narrowly focus on the smallest balance segments.
When it comes to retirement, the impact of a small balance cashout is anything but small, with Austin describing a hypothetical 25 year-old who cashes out a $3,000 balance could forego around $23,000 at retirement, and cashing out 3 times could deprive them of almost $100,000 at retirement, or about 20% of their projected retirement income.
The Dawn of Auto Portability
Transitioning from the problem to its solution, Snyder asks Williams to characterize auto portability, which Williams likens to recycling – where the deployment of technology, paired with regulatory guidance, produces a fundamental shift from the present, manual model of portability (opt-in) to an “auto” model (opt-out), whereby participants who take no action can have their balances automatically consolidated to their new plan.
As a former 401(k) plan consultant, Snyder remarks “if you’re a plan sponsor…[auto portability] seems like a lay-up” adding that “this really checks the box from a fiduciary perspective” when it comes to solving uncashed checks and missing participants.
Following a short break, the interview resumes, with Snyder asking Austin to address Alight Solutions’ experience with auto-enrollment and auto-escalation – two “automatic” predecessors to auto portability. Austin summarizes their experience, stating “automatic features work” – where data indicates that almost 75% of their client’s DC plans have adopted automatic enrollment and have dramatically boosted plan participation rates vs. non-adopters. Similarly, Austin notes that auto-escalation has increased retirement savings deferral rates, even during recent market downturns. In Austin’s view, those automatic feature “proof points” suggest that plan sponsors will be attracted to auto portability.
To close the interview, Snyder turns to Williams to identify auto portability’s benefits for plan sponsors, which Williams describes as solving their small account problem in two fundamental ways. Not only does it address the issue of small account leaving the plan, Williams points out that auto portability will also attract small balances into the plan as new hires enroll, serving to dramatically improve active employees’ financial wellness.
Williams closes the interview by discussing auto portability’s path forward, offering Snyder a “railroad” analogy. Describing the increasing connectivity that will result as Alight Solutions and subsequent recordkeepers connect to each other, Williams believes that the expanding network will begin producing a “geometric increase in traffic.”