By Tom Hawkins
In the retirement community, momentum is growing to make our 401(k) system more inclusive and to ensure that retirement savings are more equitable.
401(k) diversity, equity, and inclusion (DEI) initiatives typically encourage greater levels of engagement, access and participation for minorities, women, younger and lower-income workers – demographic segments that have been historically under-saved and under-served in our 401(k) system.
While there are many possibilities to consider, DEI-aware plan sponsors can quickly effect positive change by adapting their ‘traditional’ automatic rollover programs to include features that deliver more equitable outcomes.
DEI-related initiatives are clearly gaining momentum in the 401(k) space.
Influential industry groups, such as the American Retirement Association and the Defined Contribution Institutional Investment Association (DCIIA) have been developing industry programs, aggregating DEI content and sponsoring industry events. Large service providers are providing DEI thought leadership, including Alight Solutions, Empower and Fidelity Investments, to name just a few. Meanwhile, non-profits such as the Aspen Institute’s Financial Security Program and the Women's Institute for a Secure Retirement (WISER) regularly assemble retirement industry and public policy leaders to identify, understand and overcome challenges to obtaining financial security for all.
Across the spectrum, expanding access and making greater use of “automatic” plan design features occupies considerable DEI-oriented shelf space, as these features are supportive of increasing participation and asset accumulation across all demographics. This includes expanded usage of auto-enrollment, auto-escalation and, increasingly, facilitating emergency savings. For employers not offering 401(k) plans, auto IRAs have been making steady inroads at the state level.
The Downside of ‘Traditional’ Automatic Rollovers
One automatic plan feature that never makes the DEI cut is ‘traditional’ automatic rollovers, and for good reason: they offer no discernible benefit to disadvantaged savers. In fact, they penalize the very demographic segments that DEI initiatives strive to uplift.
What do I mean by ‘traditional’ automatic rollovers? Put simply, ‘traditional’ automatic rollover programs have one over-riding purpose – to expediently rid a plan of small-balance (<$5,000) accounts of separated participants. In so doing, these programs typically offer little or no participant education or assistance, produce copious levels of cashouts, and trap the survivors in dead-end safe harbor IRAs, where they earn paltry returns, bear outrageous fees and face barriers to exit.
DEI-Friendly Automatic Rollover Programs
Combining effective education and assistance can go a long way towards making an automatic rollover program more DEI-friendly. Simply illustrating the high cost of cashing out, as this cashout calculator does, is a big first step. But education alone is insufficient – most participants require active assistance in consolidating their retirement savings to a current employer’s plan or to an existing IRA. The combination of these two actions – education and assistance – have been demonstrated to reduce cashouts for affected participants by over 50%. This checklist can help plan sponsors assess their automatic rollover programs along these lines.
Incorporating Auto Portability
Moving forward, every plan sponsor with an automatic rollover program should consider adopting auto portability. Built on the chassis of the automatic rollover, auto portability makes plan-to-plan portability an easy default, while still giving participants the ability to opt-out. The reduction in cashout leakage disproportionately benefits minority, women, younger and lower-income participants.
Understanding the positive impact that auto portability will have in promoting diversity, equity and inclusion, the NAACP and the National Urban League both went public with their support for auto portability. Derrick Johnson, President and CEO of the NAACP, framed his organization’s support of auto portability in the context of “holistic economic inclusion” and stated that “the NAACP is committed to being a partner in advancing the implementation of Auto-Portability as an essential tool to address racialized economic inequities.” National Urban League President and CEO Marc H. Morial cited the overall racial wealth gap, as well as the increased incidence of retirement savings cash-out rates for Black Americans as problems requiring “affirmative steps” by private sector retirement plan providers, including the adoption of auto portability.
Getting to More Equitable & Inclusive Retirement Outcomes
The expansion of automatic 401(k) plan features will play an increasing role in achieving retirement savings DEI goals. When it comes to automatic rollovers, re-tooling ‘traditional’ automatic rollover program to include education and assistance and to incorporate auto portability will help deliver more equitable retirement outcomes for under-saved and under-served participants.