Despite my being a long-time and unabashed proponent of auto portability—the new plan feature that provides seamless, end-to-end portability for small 401k retirement savings accounts—it’s always felt like an uphill battle to bring about its widespread adoption in our 401k system.
While that battle is by no means over, in late 2021, I finally accepted and now firmly believe that auto portability is, in fact, inevitable.
Here are four key reasons why.
No 1: 401k leakage is now well understood, acknowledged, and worse
These days, everyone seems to agree on cashout leakage — that it’s a big problem, is driven by job changing, and is exacerbated by a lack of plan-to-plan portability.
Agreement on the magnitude of cashout leakage was clearly demonstrated in an authoritative November 2019 Issue Brief compiled by the Savings Preservation Working Group, which performed a meta-analysis of the best available cashout leakage studies to date. One of the most-credible studies was found to be an Employee Benefit Research Institute (EBRI) Issue Brief published in August of 2019, which pegged annual 401k cashout leakage at $92.4 billion.
“401k cashout leakage has most certainly accelerated during the ‘Great Resignation'”
$92.4 billion is a lot of leakage. Using 2020 values, it’s more than the gross domestic product (GDP) of 147 countries and 13 U.S. states, and more than the amount that the U.S. federal government spends on 7 large government agencies.
Even worse, 401k cashout leakage has most certainly accelerated during the “Great Resignation”—where quit rates have surged to record highs – at least 50% higher than the levels prevailing at the time of EBRI’s estimate. The Great Resignation, perhaps more than any other issue, could represent the tipping point for collective action to stem 401k cashout leakage.
No. 2: Auto portability has broad benefits
When it comes to solving 401(k) cashout leakage, no other solution comes close to auto portability, and it’s hard to find anyone who doesn’t benefit from the feature.
When considered across the entire U.S. defined contribution system as a standalone public policy initiative, EBRI estimates that full adoption of auto portability for balances less than $5,000 will generate $1.5 trillion in incremental retirement savings, in present value dollars. EBRI has also repeatedly found that auto portability, when combined with virtually any public policy initiative that expands plan access, will dramatically increase that policy’s benefits.
For defined contribution plan service providers, auto portability will preserve small-balance retirement savings within the system and create a more robust, efficient, and profitable market for their services.
Finally, for plan sponsors, auto portability will increase average plan balances, reduce the problems associated with a proliferation of small balance accounts (plan costs, missing participants, and uncashed checks), while making a substantial contribution to employee financial wellness.
No. 3: Participants want auto portability
In EBRI’s 2021 Retirement Confidence Survey (RCS), actual plan participants gave auto portability their overwhelming endorsement, with nearly nin of 10 respondents indicating that the feature would be valuable. Even more compelling, the RCS also found that the demographic segments that stand to benefit the most from auto portability – minorities, younger age groups, and lower-income segments —value the feature even more.
If EBRI’s finding wasn’t enough to convince you, a recent AARP survey indicated that 99% of respondents viewed the portability of retirement savings as very/somewhat important. That is an extraordinary result, to say the least.
No. 4: There is broad-based support for auto portability
Legislators, regulators, and trade organizations are uniformly supportive of auto portability, while early adoption by large, prestigious recordkeepers is accelerating.
In particular, the final four months of 2021 saw some incredibly positive developments for auto portability:
- In September, another large and highly-prestigious recordkeeper announced their plan to offer auto portability to their plan sponsor clients and their participants.
- In October, the U.S. Senate’s Special Committee on Aging held a hearing focusing on solving cashout leakage via auto portability, which legislators vocally supported.
- In November, Brian Graff, CEO of the powerful and influential American Retirement Association, voiced his support for auto portability in a podcast interview with 401(k) Specialist’s John Sullivan.
- In December, at EBRI’s 90th Public Policy forum, Kathleen Kennedy Townsend, Special Assistant to the Secretary of Labor, identified portability and leakage as one of the agency’s three top retirement priorities, and expressed views highly favorable to the adoption of auto portability.
If I’m wrong, time will tell. But kicking off the New Year, I’ve never been more confident about the prospects for auto portability than I am right now.
Tom Hawkins is Senior Vice President, Marketing and Research with Retirement Clearinghouse, and oversees all key operational aspects of this area, including RCH’s web presence, digital marketing and plan sponsor proposals. In other roles for RCH, Hawkins has performed product development, helped lead the company’s re-branding, evaluated and organized industry data, and makes significant contributions to RCH thought leadership positions.