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THE INSTITUTIONALIZATION OF PORTABILITY IS KEY TO REDUCING CASH-OUT LEAKAGE

By  Spencer Williams May 20, 2020, 10:45 a.m. EDT 4 Min Read
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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.

Spencer Williams
President and CEO, Retirement Clearinghouse
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401(k) 401(k) fees Retirement planning Retirement readiness
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