Much has been written about America’s retirement-savings shortfall. Much has also been written about one of the major reasons for this shortfall—the lack of technology and operating standards to make seamless plan-to-plan savings portability easy for America’s highly mobile workforce. The cumbersome and costly nature of DIY portability has made prematurely cashing out small-balance 401(k) savings accounts, or stranding them in former employers’ plans, the easiest options for many participants after they change jobs.
Consolidation Corner Blog
Consolidation Corner is the Retirement Clearinghouse (RCH) blog, and features the latest articles and bylines from our executives, addressing important retirement savings portability topics.
“Not having enough emergency savings for unexpected expenses” is the No. 1 financial concern for Millennials and members of Generation X, and the No. 2 financial concern among Baby Boomers, after retirement security. These findings from a PwC Employee Financial Wellness Survey released last year shouldn’t surprise members of the retirement services industry, since too many defined contribution plan participants dip into their 401(k) savings—through loans, hardship withdrawals, or cash-outs upon changing jobs—to fund emergency expenses.
With the announcement of the Department of Labor’s recent actions, auto portability has taken center stage in the retirement industry. While auto portability has been well-known to a relatively small group of industry insiders, its recent, widespread coverage in the media has many asking the question “what is auto portability?”
With so many different -- and important -- perspectives on the matter, the best answer will depend on who’s asking the question.
When auto enrollment was widely adopted under the Pension Protection Act of 2006, it was a well-intentioned idea for helping Americans save more for retirement.
But in this case, what seemed like the perfect recipe for increasing retirement savings for hardworking Americans was missing a key ingredient.
Over the past few years, we’ve written extensively about auto portability -- what it is, how it works and the significant, positive impact it will have on the retirement security of working Americans. Our positions have been supported by research, predictive models (including EBRI’s RSPM) and real-world results from the initial implementation of auto portability.
In this article, we address an important retirement public policy question: How would a pairing of auto portability with open multiple employer plans (or “open MEPs”) impact the retirement savings of America’s minorities, and particularly, African-Americans?
With unemployment nearing historic lows, more career opportunity inevitably translates into greater job mobility. That means that more 401(k) participants will be changing jobs and will face important decisions on what to do with their retirement savings.
It was the best of times, it was the worst of times.
For job-changing 401(k) participants with balances greater than $15,000, it was the spring of financial wellness, as the bulk of their retirement savings would remain intact. For less-aristocratic 401(k) savers with balances below $15,000, it was the winter of despair, as most of their savings would be lost on the cashout chopping block or forcibly exiled to a safe harbor IRA, where more savings would perish.
The problem of missing participants continues to receive a great deal of attention from plan sponsors, industry advocates, regulators and politicians. All parties are keen to address the negative outcomes that result when job-changing 401(k) participants leave behind their accounts with former employers, relocate and fail to update their address.
Following World War II, America saw the rise of a “throwaway” society – consuming, squandering and discarding vast quantities of national resources. Gradually, an awakening occurred as we realized that conservation was a more-sustainable path. Recycling models emerged, and once fully-adopted, they became deeply-ingrained in our psyches and formed a pillar of corporate social responsibility.
America’s defined contribution system is unsustainable – urgently requiring an upgrade to effectively deliver on its intended goal – helping millions of Americans enjoy a timely and comfortable retirement.