Consolidation is a powerful force in our world. Many of the world’s largest corporations are products of consolidation, and there are countless examples of the power of consolidation in our personal lives.
When it comes to retirement savings, former Plan Sponsor Council of America (PSCA) President David Wray recognized the power of consolidation back in 2012 when he coined the phrase “consolidate the balances” in this prescient article, observing that 401(k) account consolidation is inherently efficient and exerts a protective effect on retirement savings as participants change jobs.
Twelve years on, with the advent of a large-scale auto portability initiative specifically intended to promote consolidation, Wray’s vision is rapidly taking shape, and plan sponsors are beginning to embrace consolidation.
Here are six key facts about retirement savings consolidation that you should know:
1. Consolidation occurs when two or more qualified retirement savings accounts are combined into one.
Simply rolling over a 401(k) balance to a newly opened IRA does not represent consolidation.
Similarly, small-balance 401(k) accounts that are automatically forced out into traditional safe harbor IRAs do not produce consolidation. Instead, they trap unfortunate participants in dead-end safe harbor IRAs, where they earn paltry returns, bear outrageous fees and face barriers to exit.
True consolidation relies upon the application of portability to work, such that the balance in one account can seamlessly move to another, already existing account. This is a fundamental principle upon which auto portability is built.
2. Consolidation discourages cashout leakage and promotes the preservation of retirement savings.
The consolidation of retirement savings within the defined contribution system is proven to dramatically improve participant outcomes. According to empirical research, effective consolidation programs result in 401(k) plan participants being 50% less likely to cash out their retirement savings, regardless of their balance size.
3. Consolidation saves participants time & money, eliminating redundant fees and simplifying retirement planning.
When two accounts become one, 401(k) plan participants save both time and money – enjoying greatly simplified retirement planning, while reducing the overall fees associated with maintaining multiple retirement savings accounts.
In a hypothetical example, participants who pay an average account fee of $56 who consolidate an account at age 25 and again at age 30 could have an additional $18,000 in retirement savings at age 65, based on an average annual return of 6.5%.
Finally, when the time comes to retire, participants’ transition to retirement income will be comparatively straightforward, vs. their unconsolidated counterparts.
4. Consolidation reduces cybersecurity risks through the elimination of multiple accounts.
Multiple, unconsolidated 401(k) accounts represent a larger cyber “attack surface” for hackers to exploit. Consolidating redundant 401(k) accounts effectively reduces the threat posed by hackers, conferring benefits to individuals, plan sponsors and providers.
5. Participants overwhelmingly support portability initiatives that promote plan-to-plan consolidation.
Plan participants intuitively understand that consolidation is in their best interests, with at least four highly credible surveys revealing their preferences for seamless portability:
- In March 2018, a Boston Research Technologies survey (The Mobile Workforce’s Missing Participant Problem) found that 60% preferred an automated process to consolidate their accounts.
- In April 2021, EBRI’s 31st Annual Retirement Confidence Survey (RCS) found that nearly 9 of 10 respondents indicating that auto portability would be valuable.
- An October 2021 AARP survey indicated that 99% of respondents viewed portability of retirement savings as very/somewhat important.
- In April 2022, EBRI’s 32nd Annual Retirement Confidence Survey revealed that a plurality of job-changing 401(k) plan participants favored automatic plan-to-plan portability.
6. The benefits of consolidation extend to plan sponsors, providers and the entire DC system.
For plan sponsors, promoting consolidation increases plan assets, reduces plan costs, and minimizes the incidence of missing participants. These outcomes have been proven at a mega plan sponsor where, in the five years following the adoption of a program of retirement savings portability:
- Cashouts declined by over 50%, across all balance segments
- 72,000 retirement savings accounts were consolidated
- 207,800 missing participants were located
- Plan roll-ins surged, with over 15% of new participants transferring assets into the plan
There’s also plenty of evidence that consolidation contributes to a healthier retirement system that will yield significant societal benefits. Independent research from EBRI has repeatedly indicated that retirement savings portability not only strengthens the existing system but makes practically any new public policy initiative more effective.
Wray was Right
David Wray was right about consolidation. Fortunately, retirement savings consolidation has never been easier. According to the Plan Sponsor Council of America (PSCA) Annual Survey of Profit Sharing and 401(k) Plans, over 95% of defined contribution plans allow roll-ins from other plans. For many, facilitated roll-in services spare participants the hassle, complexity and worry associated with “do-it-yourself” roll-ins. Finally, when it comes to accounts below $7,000, auto portability makes consolidation a default for small accounts that are subject to a plan’s automatic rollover provisions.