The rallying cry for improving financial wellness
Half a century ago, the global medical community united to wipe out smallpox, an infectious disease that afflicted mankind for millennia. In 1966, the World Health Organization (WHO) established the Smallpox Eradication Programme, which sent Western doctors to vaccinate the populations of nations and communities around the globe where smallpox was still rampant. No place where smallpox cases had been reported, or where the local population was not vaccinated, was overlooked by WHO medical teams, no matter how remote the village or how dangerous the journey. By 1980, after just 14 years of intense global collaboration, smallpox had been eradicated. The magnitude of this achievement cannot be overstated.
If retirement sponsors and record-keepers across the U.S. demonstrate this level of dedication to improving the financial well-being of all hardworking Americans, they could put a stop to tens of billions of dollars leaving our nation’s retirement system due to cash-outs.
While this objective isn’t in the same league as wiping out a horrible disease everywhere on Earth, it’s a worthy endeavor that would help millions of Americans preserve more of their retirement savings.
Keeping 401(k) savings in the U.S. retirement system throughout one’s working life offers the best chance to achieve a financially secure retirement — but frictions within the retirement system make it costly and time-consuming for plan participants to move their savings from their former employer’s plan to their current plan when they change jobs.
Of the approximately 66.2 million defined contribution plan participants, about 22% change jobs each year, according to the Employee Benefit Research Institute — and based on research findings from the largest record-keepers, 31% of those 14.8 million job-changers (4.6 million participants) will cash out within a year of changing jobs, forfeiting the collective billions of dollars in compounded savings they would have accumulated by retirement had they not cashed out.
As reported in a 2015 study of the mobile workforce conducted by Boston Research Technologies, about 63% of these cash-outs are for non-emergency purposes. In other words, the majority of participants cash out, and reduce their future retirement income, because they view cashing out as an easier option than rolling their savings in a prior-employer plan into their account at their current-employer plan.
As of May 22, approximately $26.3 billion in total savings has been cashed out of the retirement system this year, according to the National Retirement Savings Cash-Out Clock. If nothing is done to stem the outflow, this cash-out “leakage” of assets from the retirement system will reach $68 billion by year-end.
This is a major financial health crisis affecting millions of Americans — and industry research indicates that younger workers in the lowest income brackets, as well as women and minorities, are at the highest risk of cashing out. Confronting this crisis requires a concerted, unified effort by plan sponsors and record-keepers to create conditions that facilitate seamless plan-to-plan asset portability for all participants.
Auto-portability is the vaccine
The widespread adoption of auto-portability — the routine, standardized and automated movement of a plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan — will make significant inroads toward the eradication of cash-out leakage.
Auto-portability is rooted in a technology solution which automates the processes of rolling 401(k) savings account balances in and out of plans. Fortunately for sponsors and record-keepers, this is not a Mission: Impossible scenario. The technology that powers auto-portability is currently in beta-testing and is expected to go live this summer. Rapid adoption of auto-portability shouldn’t be a problem either because the required plan design features are largely in place. More than 97% of defined contribution plan sponsors are capable of accepting roll-ins from other plans, according to the Plan Sponsor Council of America.
EBRI estimates that, under a scenario in which auto-portability is broadly adopted, as much as $2 trillion in savings, measured in today’s dollars, could be preserved in the U.S. retirement system. And unlike other proposed solutions for increasing Americans’ retirement outcomes, such as auto IRA programs or universal defined contribution plan coverage (neither of which remedy cash-out leakage), auto-portability doesn’t require major regulation or systemic changes to existing infrastructure. Auto-portability simply needs to harness the collective willingness of sponsors and record-keepers to work together to make it a reality.
And just like the ongoing efforts to ensure newborns are vaccinated against smallpox have kept the disease a thing of the past, the stemming of cash-out leakage over the long term will require new, improved messaging by sponsors to regularly encourage participants to roll in their prior-plan 401(k) savings when they arrive, and roll their savings over to their new-employer plan when they leave. After all, the best way to prevent fractured retirement savings is to make participants aware of how to prevent fractures in the first place.
The tools to eradicate smallpox existed before 1966. All that was missing, until then, was a global initiative dedicated to wiping out the disease — backed up by the will and resources of the international community to carry it out. Similarly, the tools to eradicate cash-out leakage are already here. What’s needed is a concerted effort by plan sponsors and their service providers to make auto portability the new default that will change participant behavior, eradicate cash-out leakage, and dramatically improve the financial wellness of millions of workers.
Spencer Williams is President and CEO of Retirement Clearinghouse, a portability solutions provider.