Why Preserving Small Balances Matters (and How Auto Portability Helps)

The preservation of small-balance 401(k) accounts – particularly those under $7,000 and subject to 401(k) plans’ automatic rollover provisions – represents an important challenge for America’s retirement system.

When job-changing workers cash out or abandon these accounts in dead-end safe harbor IRAs, they lose not just immediate savings, but can forego decades of compounded growth – reducing their odds of a comfortable or timely retirement.In this article, I examine four compelling arguments for the importance of preserving small balances, while demonstrating how auto portability, as delivered by the Portability Services Network (PSN), can help achieve this goal.

1. Facing Down Future Uncertainties
Preserving small balances is essential to combat three escalating retirement threats:

• Increased longevity extends retirement periods, demanding greater retirement savings. Small balances, if preserved, compound into critical income streams over time.
• Rising healthcare costs threaten to deplete savings, with couples now facing almost $400,000 in retirement healthcare expenses. Preserved retirement savings balances can help provide a buffer against medical costs.
• Ongoing inflation erodes purchasing power. Retaining savings in tax-advantaged accounts allows investments to outpace inflation, unlike cashouts which convert assets to taxable income and subsequently, to consumption.

Auto portability directly counters these risks by reducing cashout leakage. For example, a 30-year old who cashes out a $7,000 balance will net only $4,900, while the same participant who preserves their savings could see them grow to over $74,000 by retirement at age 65, assuming 7% annual returns. This compounding effect transforms even modest savings into meaningful security, helping to maintain independence when retirees face unforeseen expenses.

2. Reaching the $10,000 Hurdle
One of my favorite retirement savings studies is The $10,000 Hurdle (Bailey and Pang, Northern Trust, 2016).This study revealed that the $10,000 retirement savings balance mark is where participant behavior tends to shift, from vice to virtue.

• Behavioral momentum: Participants with balances above $10,000 are 50% more likely to maintain consistent contributions, creating a "snowball effect" in savings behavior.
• Compounding efficiency: Larger balances generate exponentially greater returns. A $7,000 balance growing at 7% annually reaches $10,000 in just six years—unachievable if cashed out.
• Fee mitigation: Small accounts often incur proportionally higher fees. Consolidation via auto portability reduces costs and accelerates growth toward this critical milestone.

Auto portability bridges this gap by seamlessly moving sub-$7,000 balances to active accounts, where ongoing contributions and compounding push participants over the $10,000 hurdle faster.

3. Assisting Under-Served Demographic Segments
Small-balance preservation disproportionately benefits under-served groups:

• Lower-income workers: Those who earn less tend to change jobs more often and have smaller balances, subjecting them to a higher risk of cashing out. Preserving these funds through auto portability facilitates upward economic mobility.
• Women and minorities: Black workers cash out 401(k)s at 60% higher rates than white peers, while women hold 50% less median retirement wealth than men. Auto portability reduces leakage, directly combating these systemic inequities.

By automating the preservation of retirement savings for under-served demographic segments, auto portability helps to close retirement wealth gaps in vulnerable populations.

4. Meeting Fiduciary Obligations and Ethical Responsibilities
Being a plan sponsor entails a combination of non-negotiable, fiduciary obligations, paired with ethical responsibilities to do what’s right:

• Meeting ERISA fiduciary obligations: Terminated participants with balances remain "participants" under federal law. Sponsors must manage their assets "solely in their interest," including prudent fee oversight and communication.
• Managing administrative burdens: Stranded accounts increase missing participant headaches and uncashed distribution check liabilities, while increasing plan costs.
• Acting responsibly: Employers promoting retirement readiness for active workers undermine their credibility by neglecting departing employees. In addition, employers’ active participants may have small balances with prior plans or safe harbor IRAs from a previous automatic rollover. A consistent message to preserve small balances will benefit all employees and aligns with corporate social responsibility goals.

For preserving small balances, PSN’s auto portability technology, combined with its networking approach, operationalizes the attainment of these goals.

Auto Portability as a Systemic Fix
Preserving sub-$7,000 balances through auto portability addresses intersecting issues: retirement insecurity, wealth inequality, the management of fiduciary risk and corporate social responsibility.

The retirement system’s integrity and well-being hinges on ensuring that every worker’s savings – regardless of balance size – contribute to lifelong financial security. Auto portability is shifting the preservation of small balances from lofty ideal to an operational reality, safeguarding Americans’ futures one balance at a time.