Three recent developments indicate that the retirement industry is waking up to the need to address 401(k) cashout leakage, and importantly – from within the framework of corporate social responsibility.
Development 1: Increasing awareness of the problem of cashout leakage
Put simply, our 401(k) system has a sustainability problem, where millions of plan participants change jobs and prematurely withdraw their retirement savings, incurring taxes and penalties.
- According to EBRI, each year over 4.5 million job-changing participants will cash out $92.4 billion in 401(k) savings.
- The bulk of cashout leakage is NOT due to financial emergencies, which accounts for only one-third of the total. About two-thirds of cashouts are triggered by systemic friction, or a lack of portability.
- Most affected by cashout leakage are those who can least afford it, including minorities, women, lower-income and younger age groups.
Development #2: Viable financial technology solutions
The most effective solution to 401(k) cashout leakage is plan-to-plan portability, which allows 401(k) plans to better accommodate a highly mobile workforce.
- In 2013, Boston Research Technologies concluded that a program of plan-to-plan portability was effective in stemming cashout leakage, resulting in a 51% decrease in cashouts.
- According to EBRI, auto portability, when applied to balances under $5,000, could preserve $1.5 trillion in savings over a generation.
Development #3: The influence of corporate social responsibility (CSR)
- The rise of corporate social responsibility (CSR) is extending a 401(k) plan sponsor’s obligations beyond the legal framework set forth by ERISA, to include the promotion of societal benefits. For example, DC plan sponsors are increasingly embracing Environmental, Social and Governance (ESG) screening criteria in plan investment options, despite having no legal obligation to do so.
- ln August 2019, the Business Roundtable released a statement redefining the purpose of a corporation. In the statement, 181 of the nation’s largest employers – including five large 401(k) plan recordkeepers – agreed to promote “an economy that serves all Americans.”
Are socially conscious corporations waking up and acting?
Signs points to yes:
- A 2020 Alight survey finds that 56% of plan sponsor respondents – representing 5.5 million employees – are interested in “automatically roll[ing] balances from one employer’s DC plan to another employer’s plan when individuals change jobs.”
- Writing in Forbes, retirement policy expert Angela Antonelli, executive director of the Georgetown University Center for Retirement Initiatives (CRI), sounded an urgent call-to-action for retirement plan sponsors to make auto portability “the new normal for employees who switch jobs.”