By Pension and Benefits Editorial Staff
A recent Employee Benefit Research Institute (EBRI) study addresses the potential benefits of using auto portability for handling 401(k) accounts upon termination of employment. EBRI’s “The Impact of Auto Portability on Preserving Retirement Savings Currently Lost to 401(k) Cashout Leakage” examines automatically taking a participant’s account from a former employer’s retirement plan and combining it 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. Cashouts are the most significant form of leakage from DC plans, especially among workers with low plan balances.
Background. According to EBRI, many of the 401(k) plan perceived limitations were dealt with, in part, through automation practices encouraged by the Pension Protection Act of 2006, which, EBRI notes, include automatic enrollment, auto-escalation, and the utilization of target-date funds as investment options, which increased participation rates, encouraged savings, and optimized asset allocations. However, as EBRI points out, no effective solution has been implemented to address the 401(k) cashout leakage problem.
EBRI’s research analyzes the impact of auto portability, in which 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. The effect of this would be to keep the defined contribution assets in the retirement system and, thus, theoretically, to reduce leakage from cashouts on termination of employment, EBRI suggests.
Impact of auto portability. Using EBRI’s Retirement Security Projection Model,® the study projects that auto portability would produce 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.
As a stand-alone policy initiative, EBRI projects that the present value of additional accumulations over 40 years resulting from “partial” auto portability, which would be applied to accounts with participant balances less than $5,000, would be $1,509 billion. The value would be $1,987 billion under “full” auto portability, which would apply to all accounts regardless of the size of a participant balance. Under partial auto portability, those currently 25-34 are projected to have an additional $659 billion in retirement funds, increasing to $847 billion for full auto portability, EBRI suggests.
“When considered in tandem with other legislative initiatives that expand workplace access to retirement plans, we found that the addition of auto portability with auto-IRAs resulted in an aggregate reduction in the Retirement Savings Shortfall by an incremental $293 billion, for a total reduction of $697 billion or 18.2 percent of the current deficit,” said Jack VanDerhei, EBRI’s director of research and the author of the EBRI study. “While policies that expand retirement plan coverage can significantly impact aggregate savings shortfalls, our analysis further suggests that an auto portability initiative that reduces plan leakage can materially augment such efforts.”
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