By Tom Hawkins
For years, regulators, policymakers and, of course, 401(k) plan sponsors have struggled with the vexing problems of missing participants, uncashed distribution checks and small, forgotten accounts. Every year, sponsors beseech regulators for clear guidance to mitigate their fiduciary risk, while lawmakers propose policies such as lost and found registries to help deal with the problems. Yet, the problems persist and have grown worse over time, even accelerating recently due to The Great Resignation.
Unfortunately, none of the guidance requested nor the solutions that have been proposed deal with the underlying, root causes – high workforce mobility, paired with an absence of easy plan-to-plan portability.
However, there is one solution that deals with the causes and cures many of the problems: auto portability.
The Magnitude of the Problems
Missing participants, uncashed distribution checks and small, forgotten 401(k) accounts are a big problem, and have long plagued America’s defined contribution plan system.
- A March 2018 survey by Boston Research Technologies revealed that 11.3% of separated 401(k) accounts have a stale address, suggesting that there are, at minimum, 3.1 million 401(k) missing participant accounts. Subsequent research by Retirement Clearinghouse indicates an even larger problem with stale addresses for terminated participants with no obvious "red flags" (ex. - returned mail).
- The bulk of uncashed distribution checks result from automatically generated distributions for former participants with balances under $1,000. According to EBRI data, every year approximately 1.6 million job-changers leave behind balances below $1,000. Multi-year data from a mega-plan sponsor (250,000+ participants) shows that 10.5% of these checks will go uncashed.
- While no one knows for sure how many small 401(k) accounts are truly “forgotten” – one thing is certain: there’s an explosion of both small-balance 401(k) accounts and small-balance IRAs. The same March 2018 survey noted above also indicated that 32.8% of respondents learned of an employer-sponsored retirement savings account they didn’t realize they had. Collectively, this data points to a large and growing problem that is likely exacerbated by automatic enrollment.
How Auto Portability Will Help
Auto portability works in two fundamental ways to solve the problems of missing participants, uncashed distribution checks and small, forgotten accounts:
1. Promoting Consolidation
By promoting consolidation, auto portability dramatically reduces the number of left-behind, small-balance 401(k) accounts, reducing the incidence of 401(k) accounts with stale addresses, uncashed distribution checks or forgotten balances. Data from the Auto Portability Simulation shows that, over 40 years, the adoption of auto portability would result in a net increase of 124.3 million plan-to-plan roll-ins of small balances, over 40 years. This figure also includes participants with balances under $1,000, whose accounts can also be consolidated via auto portability, vs. automatically cashing them out.
2. Auto Location of Missing Participants
While consolidation exerts a powerful, direct effect on reducing the incidence of missing participants, uncashed distribution checks and forgotten accounts, it won’t eliminate the problem completely. Fortunately, auto portability’s “auto locate” feature that automatically locates a participant’s current, active account for the purposes of consolidation could also be leveraged to determine a participant’s address on file with their current employer, even when a consolidation is neither indicated nor required. The March 2018 survey noted above also indicated that an active participant address record is very reliable, with a 92% probability of being the accurate current address.
Auto portability’s active measures stand in contrast to more “reactive” approaches, such as relying solely upon missing participant searches, or creating a government-administered lost and found in which to register (or under certain proposals, house) small, forgotten accounts and uncashed check balances. While these measures may have their place, by themselves they do nothing to address the upstream, root causes of the problem.
A More Effective Solution
Auto portability has received a lot of well-deserved attention for its ability to reduce cashout leakage by automatically consolidating small-balance retirement savings, but its effect on preserving participants’ retirement savings is only half of its compelling story.
The combination of small account consolidation, along with a vastly improved means of locating residual missing participants, means that auto portability represents the most effective means to ensure that participants receive all the retirement benefits that they’re owed, and to relieve the burden currently placed upon plan sponsors.