By Tom Hawkins
When research performed 8 years ago reveals that your 401(k) plan, by turning on portability and consolidation for all participants, has halved cashout leakage and dramatically reduced its small account problem, what do you do for an encore?
Plenty, it turns out. In a “sequel” to the 2013 study by Boston Research Group (now Boston Research Technologies), a new study by Retirement Clearinghouse (RCH) revisited a mega plan sponsor’s ongoing experience in the subsequent period from 2013 to 2020, and found that not only have the benefits of the original program persisted, they’ve grown, with plan participants continuing to realize significant, measurable benefits.
Back to the Future
The 2013 study, Eliminating Friction and Leaks in America’s Defined Contribution System, revealed dramatic benefits derived from a program of retirement savings portability as experienced by a top-five 401(k) plan sponsor. With over 250,000 participants and a diverse workforce characterized by high employee turnover (20%+ per year), the plan had experienced serious problems with excessive cashout leakage (47% across all balances) as well as a build-up of small, terminated participant accounts.
The original case study examined the five-year period from 2002-2006, where there was no particular emphasis on retirement savings portability, with the six-year period from 2007-2012, following the implementation of multiple retirement savings portability initiatives.
During the 2007-2012 period:
- Cashouts were reduced by over 50%, across all balance levels.
- Consolidation was enabled for all participants, regardless of balance.
- A facilitated roll-in program was launched.
At that time, the results were so dramatic that the study’s author, Warren Cormier, could be excused for hyperbolically characterizing the program as the model for the America’s defined contribution system, writing that, “if scaled and extended to the entire DC industry, [the program] could meet the goal of a 50 percent reduction in leakage/cash-outs.”
The Gains Keep Coming
It turns out that Cormier’s 2013 exuberance was justified.
The March 2021 follow-on study examined a comprehensive dataset of 705,166 terminated participant elections, specifically analyzing the decisions of participants who terminated employment during the 2013-2020 timeframe and comparing them to the original study.
The new study delivers four key findings:
- The significantly reduced cashout levels observed in the original study have been maintained, and even further reduced during the 2013-2020 timeframe. Across all balances, the average percentage of terminated participants cashing out declined from 23.0% to 22.4%, while on an asset basis, cashouts decreased even further, from 11.3% to 8.0%.
- Cashout reductions were observed for younger participants (ages 21-40) and for participants with lower balances (under $5,000). These targeted reductions, contends the study, could be critical to reducing retirement savings shortfalls.
- Since 2013, levels of account consolidation both into and out of the plan have significantly increased. Not only did the magnitude of consolidation increase, the mix of consolidation that occurred within the DC plan system rose significantly, from 31.3% of all consolidations during 2007-2012, to 42.5% from 2013-2020.
- The study calculates the measurable impact of retirement savings portability on participants’ financial wellness over the entire period from 2007-2021 as:
· $1.12 billion: Nominal value of retirement savings preserved by reducing cashouts
· $79.4 million: Potential participant fee savings realized through account consolidation
Implications for Retirement Savings Public Policy
While the results have been overwhelmingly positive, the study identified one terminated participant balance segment – between $5,000 and $10,000 – that has not experienced the same levels of cashout reductions as other, adjacent segments, and suggests that public policy could play a role in opening this segment up to auto portability.
From the Olympian view, one can now conclude with assurance that 401(k) retirement savings portability, as already implemented in the private sector, can be highly successful in preserving retirement wealth. Far from being hyperbolic, this new study makes it clear that Cormier’s 2013 conclusions were, in hindsight, eminently correct.