It’s generally accepted that the small-balance accounts of terminated 401(k) plan participants have been a problem for plan sponsors, resulting in increased plan costs, fiduciary risk and other ancillary problems, such as missing participants and uncashed distribution checks.

Now, based on new information from EBRI and other sources, we’re learning that small accounts are a large and growing problem for active participants as well.

As much as $2 trillion could be retained in the U.S. retirement systems if Auto Portability were fully implemented, according to new research by the Employee Benefit Research Institute (EBRI). The research establishes Auto Portability as a leading retirement industry public policy initiative, placing it ahead of auto IRA initiatives and just behind universal DC coverage in terms of impact on total retirement savings shortfall.

Over the past year, the Department of Labor’s Fiduciary Rule has been highly-visible, presenting major ramifications for the retirement industry and looming large on the radar screens of retirement services providers.  

The underlying rationale for the rule, as stated by the Obama administration in an April 6, 2016 press briefing, was to save retirement investors $17 billion per year in lost retirement savings that result from conflicts of interest in retirement advice. Certainly, anything that protects $17 billion in retirement savings is a worthy goal, if it helps more Americans meet their retirement income needs.
However, there’s a larger hole in our retirement system – cash-out leakage – that inflicts far greater harm to American retirement savers, yet this threat continues to fly beneath our collective radar.   

On February 3^rd, the U.S. Chamber of Commerce, the world’s largest business federation representing the interests of more than 3 million businesses, released Securing America’s Retirement, their legislative roadmap aimed at strengthening the U.S. retirement system.

The Chamber’s goals are admirable.

Under-participation by minorities in America’s 401(k) system represents a significant economic disparity that requires creative, private-sector solutions.

Auto portability – an emerging plan feature that automatically moves small balance accounts forward when participants change jobs – could play a critical role in helping to bridge the participation gap.

In his December 1, 2015 article (The unintended consequence of 401(k) auto-enrollment), RCH CEO Spencer Williams exposes the linkage between auto enrollment and lower average account balances.  Based on Form 5500 data, Williams’ analysis presents some excellent examples of industries where average balances are significantly lower in plans that have adopted auto enrollment compared to plans that haven’t. 

In his December 16^th, 2015 article in MarketWatch, RCH’s CEO Spencer Williams offers a year-end checklist for those retirement savers who’ve elected to leave qualified retirement savings accounts behind with their former employers.

In his December 11^th article in BenefitsPro (Addressing the Critical Problem of 401(k) Cash Outs), Nick Thornton draws much-needed attention to the magnitude of the 401(k) cash out leakage issue, due to the frictions associated with account portability when plan participants switch jobs. Thornton’s article rightly emphasizes the need for automated portability – similar to automatic enrollment and deferral increases - to effectively address the cash out problem. 

Auto enrollment, codified in law by the Pension Protection Act of 2006, was drafted with the best of intentions—to increase Americans’ retirement savings—but it has had the unintended consequence of impairing plan effectiveness. By proliferating small accounts in plans, auto enrollment has caused a decrease in average account balances throughout the U.S. retirement system. Adding to the urgency of this issue is the rising rate of auto enrollment adoption across defined contribution plans of all sizes, but particularly among larger plans.

The Pension Protection Act of 2006 created a safe harbor for retirement plan sponsors to automatically enroll employees in their plans. This provision was designed to help plan sponsors and participants over the long term, and it has—but it also unintentionally fueled a surge in small accounts, hurting both constituencies.