By Neal Ringquist
Following on the heels of three compelling events that occurred in 2021, 401(k) plan sponsors would be well-served by making three 2022 New Year’s resolutions that, if acted upon, could deliver significant benefits for their plans, for their participants and ultimately, for the entire 401(k) ecosystem.
Three Important 2021 Events
In April 2021, the Employee Benefits Research Institute (EBRI) released their 31st annual Retirement Confidence Survey (RCS), and with its results, the case for plan-to-plan portability became a lot stronger. In that survey, EBRI found that nearly 9 in 10 participants believe that auto portability would be a valuable plan feature. Even more impressive than the overall response, the survey also found that specific demographic segments that benefit the most from auto portability want it even more -- including minorities, younger age groups and lower income segments.
In September 2021, another large defined contribution recordkeeper announced plans to introduce an auto portability service for their 401(k) sponsor clients and their participants, to be launched in mid-2022. With that announcement, auto portability has been embraced by two of America’s top ten defined contribution recordkeepers, collectively serving almost 10 million employees.
Finally, throughout 2021 the so-called “Great Resignation” accelerated, exacerbating cashout leakage in both the short- and medium-term. To avert disaster, auto portability has become an imperative, with the potential to transform the “Great Resignation” into the “Great Consolidation.”
Collectively, these events are indicative of the need to deploy true plan-to-plan portability to solve the problem of cashout leakage.
Three Key New Year’s Resolutions
With the “portability imperative” in mind, here are three 2022 “resolutions” that we believe fit nicely.
Resolution #1: Adopt Auto Portability: If you’re a 401(k) or other defined contribution plan sponsor, resolve to adopt auto portability in 2022. A first step would be to check this page to see if your recordkeeper supports the feature. If they do, ask them how to adopt it for your plan. If your recordkeeper has not yet embraced auto portability, ask them to.
If you’re a defined contribution recordkeeper who already supports auto portability, congratulations – you’re a market-leading innovator, you’re acting responsibly, and you’re setting yourselves apart from your competition. If you don’t support auto portability, resolve to do so in 2022. Auto portability represents a private-sector solution to cashout leakage that benefits everyone – including your plan sponsor clients, their participants, and your practice. Public policymakers and regulators now understand and support auto portability, and your determined action to adopt the feature will not only benefit the entire 401(k) ecosystem, but it will also demonstrate that the private sector understands the magnitude of the problem of cashout leakage and is acting to resolve the problem.
Resolution #2: Offer an Assisted Roll-In Service as Part of a Financial Wellness Program: With industry research showing pent-up demand among participants for a comprehensive roll-in solution for their prior employer 401(k) accounts, sponsors should fulfill their fiduciary duty by offering consolidation/roll-in assistance as part of their financial wellness programs, particularly for new hires.
Similar to EBRI RCS results regarding auto portability, a previous study in May 2015 study by Warren Cormier, Portability and the Mobile Workforce, indicated overwhelming interest by participants in an assisted roll-in program, where 93% of the survey respondents viewed an assisted roll-in program as a good or excellent benefit.
Financial wellness can sometimes be tough to measure, but the results of a program of portability are easy to quantify. In March 2021, Retirement Clearinghouse released a case study at a mega plan sponsor (over 275,000 participants) revealing that during the period from 2013-2020, a program of portability and account consolidation served to decrease cashouts by $1.12 billion, and saved participants an estimated $79.4 million in fees.
Resolution #3: Pilot a Facilitated Roll-Out Program: Whereas an assisted roll-in program is targeted at new or active employees, a facilitated roll-out program is intended for separated employees who are not subject to a plan’s mandatory distribution provisions.
Following a job change, these participants typically receive a termination notice outlining their options for the plan account (leave in-plan, cash out, rollover to an IRA, or roll-in to a new employer plan), which is often accompanied by a distribution form. Unfortunately, absent any meaningful education and assistance, most participants will take the easiest path – either cashing out or leaving the balance behind – as neither decision involves the headache of navigating contribution forms for an IRA or the new employer plan.
Both options are sub-optimal, as cashing out wreaks havoc on retirement outcomes, while leaving balances in-plan can result in higher fees, forgotten accounts or both, and can eventually present fiduciary challenges for plan sponsors.
For these participants, the timely provision of unbiased education and one-on-one assistance via a facilitated roll-out program can make a tremendous difference in retirement outcomes, allowing the participant to easily implement the decision that’s right for their needs. Research indicates that a facilitated roll-out program can consistently reduce cashout leakage levels by over 50%, across all balances.
Finally, a roll-out program can be easily implemented at no cost to the sponsor, negligible cost to the participant, and can mitigate fiduciary risk by reducing missing participants.
Make 2022 Better by Embracing Portability
Initiatives that facilitate portability are the hot new trend for plan sponsors, since they not only reduce fiduciary risk but make significant, quantifiable contributions to employee financial wellness programs by preserving retirement savings.
As the old saying goes, there’s always room for improvement. This is true not only for plan sponsors, but for participants and for 401(k) service providers. Making and following through on these resolutions could deliver huge benefits for all in 2022.