Many of the perceived limitations of 401(k) plans were partially dealt with via previous automation practices encouraged by the Pension Protection Act of 2006, including automatic enrollment, auto-escalation, and the utilization of target-date funds as investment options, all of which served to increase participation rates, encourage savings, and optimize asset allocations.
Significantly, no effective solution has been implemented to address the problem of 401(k) cashout leakage, which occurs post-termination, where each year approximately 40 percent of terminated participants elect to prematurely cash out 15 percent of plan assets. For 2015, it was estimated that $92.4 billion was lost due to leakages from cashouts, representing a serious problem that affects the potential of 401(k) plans to produce adequate income replacement in retirement.
Research was conducted which analyzed the impact of auto portability, where a participant’s account from a former employer’s retirement plan would be automatically combined with their active account in a new employer’s plan. This would help keep the defined contribution (DC) assets in the retirement system and — in theory — reduce leakage from cashouts upon employment termination.
This research found that:
- Considering auto portability as a stand-alone policy initiative, they project the present value of additional accumulations over 40 years resulting from “partial” auto portability (participant balances less than $5,000 adjusted for inflation) would be $1,509 billion, and the value would be $1,987 billion under “full” auto portability (all participant balances). Under partial auto portability, those currently 25–34 are projected to have an additional $659 billion, increasing to $847 billion for full auto portability.
- Auto portability produces significant decreases in retirement deficits for specific demographic segments, ranging from 13 percent for single females to 29 percent for married households where the female dies first. For households with 21–30 years of future eligibility, the decreases range from 21 percent for single females to 38 percent for married households where the female dies first.
- Auto portability, when combined with automatic-enrollment-enabled defined contribution plans, results in significantly higher defined benefit (DB) plan generosity parameters needed for equivalence, suggesting that auto portability could assist in the ongoing shift from DB to DC plans.
- When considered in tandem with other legislative initiatives that expand workplace access to retirement plans, they measured the incremental impact of auto portability. An analysis that combined auto portability with auto-IRAs showed that, in aggregate, the Retirement Savings Shortfalls (RSS) would be reduced by an additional $293 billion for a total reduction of $697 billion or 18.2 percent of the current deficit. This analysis suggests that while policy to expand retirement plan coverage can significantly impact aggregate savings shortfalls, an auto portability initiative that reduces plan leakage can materially augment such efforts.
Source: The Impact of Auto Portability on Preserving Retirement Savings Currently Lost to 401(k) Cashout Leakage. EBRI Issue Brief Summary, Jack VanDerhei, August 15, 2019.