Using auto portability for handling 401(k) accounts upon termination of employment would significantly reduce plan leakage, according to a study released Thursday by the Employee Benefit Research Institute.
The study examined the impacts of auto portability, in which a participant's account from a former employer's retirement plan is automatically combined with their active account in a new employer's plan. This would help keep the defined contribution assets "in the retirement system and — in theory — reduce leakage from cashouts upon employment termination," according to the study.
EBRI estimated $92.4 billion was lost in 2015 because of leakages from cashouts.
Auto portability would produce significant decreases in retirement deficits for specific demographic segments, ranging from 13% for single females to 29% for married households where the female dies first, according to the study, which used EBRI's Retirement Security Projection Model. For households with 21 to 30 years of future eligibility, the decreases range from 21% for single females to 38% for married households where the female dies first.
As part of the study, EBRI looked at auto portability as a stand-alone policy initiative. It found that under "partial" auto portability, those currently ages 25 to 34 are projected to have an additional $659 billion, while "full" auto portability is projected to yield that cohort an additional $847 billion.
In the study, full auto portability is when every participant is assumed to consolidate their savings in a new employer's plan every time they change jobs (all participants arrive at age 65 with one account). Partial auto portability is when every participant with less than $5,000 (indexed for inflation) consolidates savings in their new employer's plan every time they change jobs. In both scenarios, any leakage is limited to hardship withdrawals.
On July 31, the Department of Labor gave Retirement Clearinghouse the green light to expand its auto-portability program, which is expected to reduce plan leakage and missing participants.
RCH has developed a "locate, match and transfer" technology that involves periodic queries of cooperating record keepers' systems to ascertain if the worker has become a participant in an individual account plan through re-employment and then effects a transfer of funds from their individual retirement account to that new plan, according to the Labor Department advisory opinion from 2018. (Assets must first travel through a safe-harbor IRA before the transfer to a new employer plan.)
Because RCH charges a fee to participants for its service, a Labor Department prohibited transaction exemption was required.