By Tom Hawkins
Cashout leakage, a long-standing problem in America’s defined contribution system, is a silent crisis that unnecessarily robs millions of Americans of a comfortable, timely or secure retirement. Plagued by misunderstanding and neglect, it’s vitally important to understand the problem and to take decisive action to curb it.
The fifth of a five-part series, this article addresses auto portability, a solution that not only makes sound business sense, but delivers a positive societal impact for the corporations adopting it.
The Right Thing to Do
Among policy options available to effectively reduce 401(k) cashout leakage, auto portability – the routine, standardized, and automated movement of a retirement plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan – offers the best ‘business case’ for widespread adoption, including supportive research, quantifiable benefits for all parties, a proven technology and an enabling regulatory framework.
Will auto portability be adopted for these reasons? In part, yes.
However, there’s another, perhaps even more-compelling reason that auto portability will be quickly embraced. It’s simply the right thing to do.
The Rise of Corporate Social Responsibility (CSR)
Today, corporate America’s conscience has a name: corporate social responsibility (CSR). While corporations’ primary motive is to generate profit for shareholders, they understand that other stakeholders will hold them accountable for adopting practices that enhance our society. Delivering societal benefit, while seemingly altruistic, is also good business – creating more-satisfied employees, more-loyal customers and ultimately – more profit for shareholders.
On August 19th, 2019 a dramatic public embrace of CSR occurred when the Business Roundtable
announced the release of their Statement on the Purpose of a Corporation
, signed by 181 CEOs of the largest U.S. corporations
. In that statement, each CEO made a fundamental commitment to serve their extended stakeholders – including customers, suppliers, employees and the communities they serve – committing “to deliver value to all of them, for the future success of our companies, our communities and our country.”
Auto Portability is CSR
Business Roundtable members: meet auto portability, a new 401(k) plan feature that falls squarely in-line with your commitment to CSR.
Auto portability embodies CSR by:
1. Dramatically improving participant outcomes
The most-compelling societal benefit of auto portability is the dramatic increase in savings that millions of participants will preserve for retirement, a present value that the Employee Benefit Research Institute (EBRI) projects at $1.5 trillion, over 40 years. Each year, simulation models predict that auto portability would preserve the small-balance savings of 3.8 million participants – disproportionately benefiting minorities, women, low-income workers and younger age segments. What’s more, the research also found that auto portability enhances virtually any policy initiative that expands access to retirement savings plans.
2. Providing an enhanced standard of participant care
Most corporations would be shocked to learn just how poorly their former 401(k) plan participants are treated after their small balances are forced-out into traditional safe harbor IRAs. Their predicament is particularly dire in plans served by third-party automatic rollover IRA service providers, where these providers often pay up-front fees to recordkeepers, advisors – and sometimes even plans themselves – for directing these accounts. These providers must then re-coup those payments with “set-up fees” as high as 20% of the account balance, plus a myriad of other “miscellaneous” fees that quickly drain account balances. Additionally, these providers often erect barriers to exit, such as requiring signature guarantees. These practices, while disgraceful, are all-too-common in the automatic rollover IRA industry.
Auto portability reverses this dismal dynamic through complete fee transparency, clear participant communication and a rock-solid commitment to moving a small balance account holder’s savings to their new employer’s 401(k) plan at the time of a job change.
3. Improving financial wellness
Younger American workers change jobs more frequently than their older counterparts, and consequently, are more prone to cashing out their small 401(k) balances. Without auto portability, a typical 25-year old participant will not amass retirement savings of $10,000 – a key hurdle strongly correlated with a lowered incidence of cashouts – until age 37. By contrast, with auto portability, this $10,000 balance hurdle is reached by age 31.
4. Reducing cybersecurity risk
Even when small-balance participants don’t cash out, they can leave behind a trail of stranded accounts, dramatically increasing their overall exposure to cyber-fraud. Auto portability, by securely consolidating their accounts, considerably reduces the risk.
Commitment Through Action: Adopting Auto Portability
Representing some of the nation's largest employers, the CEO signatories to the Business Roundtable’s Statement of Purpose could make a decisive contribution towards solving the 401(k) cashout leakage problem by adopting auto portability. I firmly believe that these socially-conscious corporations will be convinced that auto portability is both a sound business decision, as well as the right thing to do.