By Spencer Williams
President and CEO of Retirement Clearinghouse
Although defined contribution plan recordkeepers and sponsors have made considerable progress helping participants retain savings through reduced fees over the past decade, job-changing participants’ 401(k) savings account balances remain in a state of dangerous limbo, as participants often succumb to the temptation of cashing out. EBRI reports that at least 4.5 million—or 40%—of job-changing participants cash out $92.4 billion in 401(k) savings from the U.S. retirement system every year.
The Employee Benefit Research Institute (EBRI) estimates that the average American worker will change employers 9.9 times over a 45-year working career. But despite the high mobility of the modern workforce, the lack of seamless plan-to-plan asset portability prevents participants from easily moving and consolidating their 401(k) savings at the time of a job change. This leaves participants open to the temptation to prematurely cash out their 401(k) accounts from prior employers’ plans.
For job-changing participants with larger balances, the lack of seamless portability between plans often results in their balances moving to higher-fee retail products, bypassing all the successes plan sponsors have had reducing fees in the retirement plan system. Even the least benign decision—leaving an account behind in a former employer’s plan—often results in unintended consequences, such as paying duplicate fees or sub-optimal asset allocation.
For job-changing participants with balances of less than $5,000, they may find their balances subject to a forced cash-out, or transferred to a high-fee safe-harbor IRA through a mandatory distribution if they failed to respond to notices (or didn’t receive such notices because they didn’t inform their former employer of an address change).
In order to mitigate fiduciary liability related to participants who did not receive guidance to avoid cashing out at the point of job-change—or terminated and lost/missing participants whose balances were automatically cashed out or automatically rolled over to a safe-harbor IRA—sponsors have indicated that they want a technology solution which enables the seamless portability of 401(k) account balances.
This is why we developed 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. Auto portability is underpinned by paired “locate” and “match” algorithms working in tandem to 1) locate and identify participants who maintain 401(k) accounts in multiple plans, and 2) begin the process of rolling accounts in former-employer plans into a participant’s active account in their current-employer plan.
We built auto portability to enhance the mandatory distribution process for 401(k) accounts with below $5,000—and begin institutionalizing workflows across the U.S. retirement system for sponsors and recordkeepers to utilize in order to discourage (and hopefully prevent) job-changing participants from cashing out small-balance 401(k) savings.
The combination of auto portability for small balances, and a concierge-like service for assisting participants with larger balances as they enter and leave plans, allows plan sponsors to keep job-changing participant balances in the retirement plan system—a system they have worked so hard to institutionalize through the systematic reduction of fees.
Most sponsors are aware of the need for simplified plan-to-plan portability, and are receptive to taking steps which make it a reality for their participants. An Alight Solutions study published in January 2020, which surveyed more than 130 sponsors representing 5.5 million participants, found that 56% of employers are interested in a clearinghouse solution which easily allows workers to move 401(k) balances forward when they change jobs.
Alight also reported that a mere 21% of sponsors are satisfied with their efforts to discourage cash-outs. But Alight noted a promising tidbit—of the dissatisfied sponsors, a majority (51%) are likely to take measures to address the problem.
Solutions enabling seamless plan-to-plan asset portability for small and large 401(k) balances would also be appreciated by participants. “The Mobile Workforce’s Missing Participant Problem,” a study published in March 2018 and conducted by Boston Research Technologies Founder and CEO Warren Cormier in collaboration with Retirement Clearinghouse, reported that 60% of participants would prefer an automated process for consolidating their 401(k) accounts, as well as updating their addresses in current-employer plans.
Fortunately, auto portability has been live for almost three years. All that needs to happen now is for more recordkeepers and sponsors to adopt it, and further the institutionalization of plan-to-plan portability across the U.S. retirement system