The numbers are in, and solid. The latest weapon in the auto revolution, auto portability, would reduce cashouts and keep defined contribution assets in the retirement system and—in theory—reduce leakage from cashouts upon employment termination, according to a study from the Employee Benefit Research Institute (EBRI).
The Impact of Auto Portability on Preserving Retirement Savings Currently Lost to 401(k) Cashout Leakage examined the effects of automatically taking a participant’s account from a former employer’s retirement plan and combining it with their active account in a new employer’s plan.
Cashouts are the most significant form of leakage from DC plans, especially among workers with low plan balances, it noted.
Using EBRI’s Retirement Security Projection Model, the study projected that auto portability would produce significant decreases in retirement deficits for specific demographic segments, ranging from 13% for single females to 29% for married households where the female dies first.
For households with between 21 and 30 years of future eligibility, the decreases range from 21% for single females to 38% for married households, where the female dies first.
EBRI finds full auto portability, applied to all accounts regardless of the size, could save an additional $2 trillion.
“When considered in tandem with other legislative initiatives that expand workplace access to retirement plans, we found that the addition of auto portability with auto-IRAs resulted in an aggregate reduction in the Retirement Savings Shortfall by an incremental $293 billion, for a total reduction of $697 billion or 18.2% of the current deficit,” said Jack VanDerhei, EBRI director of research and author of the study.
While policies that expand retirement plan coverage can significantly impact aggregate savings shortfalls, “our analysis further suggests that an auto portability initiative that reduces plan leakage can materially augment such efforts,” VanDerhei concluded.
The study, “The Impact of Auto Portability on Preserving Retirement Savings Currently Lost to 401(k) Cashout Leakage,” is available at www.ebri.org.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
