If more record keepers follow its lead, Alight Solutions says it's confident that one of the industry's most vexing problems — the loss of some $6.6 billion from 401(k) retirement savings accounts annually through employee cashouts — would soon start to wane.
The record keeper was the first to make auto portability available to its plan sponsor clients and is looking to others to do the same, said Greg Long, Alight's Washington-based director of public policy.
"As more record keepers come on board, this becomes more and more valuable," he said, referring to the relatively new concept of auto portability.
The new auto-portability service, which Alight made available in the middle of 2021, ensures that small account balances that are typically forced out of retirement plans when workers leave their jobs are automatically moved to the plans of their new employers. The service is being offered through the Retirement Clearinghouse LLC, a company that specializes in retirement account rollovers.
"Leakage is a massive problem in the 401(k) area," Mr. Long said, referring to cashouts and other ways that money leaves or "leaks out" of retirement accounts.
Some 5.3 million 401(k) participants with less than $5,000 in their accounts leave their jobs annually, according to a simulation model built by the Retirement Clearinghouse. Of those, 4 million cash out their accounts, removing an estimated $6.6 billion annually from retirement plans. The model is based on data from several sources, including the Employee Benefit Research Institute, the Department of Labor's Form 5500 datasets, and studies from Alight, the Vanguard Group Inc. and Fidelity Investments.
With a record number of people quitting their jobs amid the "Great Resignation," some industry analysts worry that the leakage problem could get even worse. "We do believe the Great Resignation exacerbates the leakage problem," said Neal Ringquist, Retirement Clearinghouse's Lafayette, Calif.-based executive vice president and chief revenue officer.
Plan sponsors are permitted by law to kick out small accounts with balances under $5,000 when workers leave by offering them an option to either cash out their balances or transfer the funds to an individual retirement account or the worker's new employer's plan. Neither the cashout nor the IRA rollover option is ideal. Participants who cash out their balances are taxed on their distributions and are hit with a 10% early withdrawal penalty if under the age of 59½. Those that transfer their funds to an IRA often wind up paying much higher fees than they were in their 401(k) plan. And if a participant doesn't make a choice, the plan sponsor can roll that money into an IRA for the participant or send the participant a check.
Alight's Mr. Long describes the IRA rollover money as a "decaying asset." The money must be invested into a cash-equivalent investment, which he says typically have fees that are greater than the return.
Mr. Long also feels for participants who opt to take a check and cash out. "There is an enormous amount of money that is being penalized, then taxed and then spent that is intended to be money that should be saved for retirement," he said.