An industry effort led by six record keepers to make workplace retirement savings plans more portable and reduce the problem of 401(k) cashouts is paying off.
Since the six record keepers — Alight, Vanguard Group, Fidelity Investments, Empower Retirement, TIAA-CREF and Principal Financial — launched an automatic-portability service known as Portability Services Network last year, more than 15,000 defined contribution plans have signed up.
Savers in workplace retirement plans with PSN auto-portability service would have inactive retirement savings accounts from previous employers automatically transferred to their current plans, even if the inactive accounts have less than $7,000.
It is estimated that auto portability would preserve $1.6 trillion in savings in the U.S. retirement system over a 40-year period if it were to be adopted by plan sponsors and record keepers nationwide, according to Retirement Clearinghouse, a provider of portability and consolidation services for defined contribution plans and the technology provider behind PSN.
The issue is especially problematic for accounts involving small balances with less than $7,000 because employers are permitted by law to kick out those accounts when workers leave by either cashing out their balances or transferring the funds to an individual retirement account or the worker’s new employer plan.
Portability issues disproportionately impact minority and female savers who have found it easier to prematurely cash out their savings than to keep the money invested in the retirement system, according to Retirement Clearinghouse. The portability services provider estimates that if auto portability were adopted nationally, some 98 million minority job-changers would preserve $744 billion in extra retirement income.
“I heartily applaud the six record keepers that launched Portability Services Network for their unwavering commitment to improving the retirement welfare of America’s undersaved and underserved workers,” said Robert Johnson, chairman of PSN and Retirement Clearinghouse, in a news release Dec. 3.
Since it went live last year, PSN has completed 549 auto-portability transactions and has 7,841 auto-portability transactions in progress.
“The number of defined contribution plans that have enrolled in auto portability in just one year represents an incredible response,” said Spencer Williams, CEO of PSN and Retirement Clearinghouse. “In fact, recent survey results indicate that the response from plan sponsors has been more overwhelmingly positive than anything we’ve seen in the past regarding a new initiative from the retirement services industry.”
