Four Reasons Why 401(k) Auto Portability is Inevitable

By Thomas Hawkins
Published on January 6, 2022

AP is InevitableDespite my being a long-time, unabashed proponent of auto portability – the new plan feature that provides seamless, end-to-end portability for small 401(k) retirement savings accounts – it’s always felt like an uphill battle to bring about its widespread adoption in our 401(k) 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.

1. 401(k) cashout leakage is now well understood, widely acknowledged, and likely getting 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 8/15/19, which pegged annual 401(k) cashout leakage at $92.4 billion.

$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, 401(k) 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 401(k) cashout leakage.

2. Auto portability, the best solution to cashout leakage, has broad benefits and hurts no one.

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.

3. Participants want auto portability.

In EBRI’s 2021 Retirement Confidence Survey (RCS), actual plan participants gave auto portability their overwhelming endorsement, with nearly 9 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 portability of retirement savings as very/somewhat important. That is an extraordinary result, to say the least.

4. There is broad-based, institutional 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:

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.

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