Thomas Hawkins

On 1/26/21, Retirement Clearinghouse (RCH) released a study that advances the art and science of locating missing 401(k) plan participants. The study – Improving the Effectiveness of Electronic Missing Participant Searches – comes on the heels of U.S. Department of Labor (DOL) guidance on the topic and is highly-useful for plan sponsors who utilize electronic searches, or “e-Searches” as they are referenced in the study.

401(k) plan sponsors know all too well that sunlight – coming in the form of transparent fees and disclosures – is vital to fulfilling their fiduciary duty to act in the best interest of their participants.

In the 1960’s, counter-culture guru Timothy Leary urged a generation to “turn on, tune in and drop out.” It’s probably a good thing that I didn’t take his advice….at least not the “drop out” part! 
 

Based on solid research, we’ve long known that typical automatic rollover IRAs result in high levels of cashout leakage. We’ve also suspected that they’ve contributed to an explosion of small-balance IRAs.
 

As I wrote in a previous article, 401(k) automated portability is an idea whose time has come. To achieve that vision, how will we get from the present state to full automation of the plan-to-plan roll-in process? 

This article, as well as the video below, offers readers a roadmap for the progression from ‘tired’ to ‘wired’ and finally, to the ‘inspired’ state that will eventually characterize 401(k) roll-ins.

French author and poet Victor Hugo observed: “nothing is more powerful than an idea whose time has come.”

In theory at least, plan-to-plan portability has always been a feature of our 401(k) system. In practice, it’s been completely impractical for all but a hardy few. The idea of automating 401(k) portability was the holy grail, a ‘moonshot’ generally believed to be impossible…until now.

During the COVID-19 crisis, massive job losses combined with economic hardship and relaxed restrictions on withdrawals have created the conditions for a perfect storm of 401(k) cashout leakage. Unfortunately, this storm may soon gain more strength, when a surge in end-of-year 401(k) plan terminations could trigger a new flood of cashouts, as participants are forced to leave their former employers’ plans.

Researchers realize that long-term retirement planning is not a natural act for most 401(k) plan participants. Consequently, important 401(k) plan features have evolved (ex. – auto enrollment, auto escalation, QDIA funds, etc.) to overcome the mis-match and to promote saving for retirement. Many of these features work spectacularly well – but only for as long as participants are actively participating in that plan.

I often write about the phenomenon of cashout leakage, which occurs when participants change jobs and prematurely withdraw their retirement savings, prior to normal retirement age.

When the dust finally settles from the COVID-19 pandemic, it’s a cinch that the nation’s retirement deficit will have widened significantly, due in large measure to a flood of 401(k) cashout leakage, which will increase significantly as a result of the crisis.