Retirement Expert: 401(k)s' Portability Failure Hurts Employees

As an employee, changing jobs can be an exciting new chapter, but it often comes with a daunting task: managing your 401(k) balance. The lack of seamless plan-to-plan asset portability can lead to a high cash-out rate among job-changing participants, negatively impacting their retirement security. Let's explore the challenges employees face and how recordkeepers and sponsors can work together to improve the process.



1. Lack of seamless plan-to-plan asset portability: When employees change jobs, they often struggle to move their 401(k) balances to their new employer's plan. This inconvenience can lead to premature cash-outs, which come with significant consequences.
2. Premature cash-outs: Without easy portability, job-changing participants may cash out their 401(k) balances, resulting in substantial losses due to taxes and penalties. According to the Employee Benefit Research Institute (EBRI), at least 4.5 million job-changing participants cash out $92.4 billion in 401(k) savings from the U.S. retirement system every year.
3. Higher fees in retail products: For job-changing participants with larger balances, the lack of seamless portability often results in their balances moving to higher-fee retail products, bypassing the successes plan sponsors have had in reducing fees in the retirement plan system.
4. Forced cash-outs or safe-harbor IRAs: For job-changing participants with balances of less than $5,000, they may find their balances subject to a forced cash-out or transferred to a high-fee safe-harbor IRA through a mandatory distribution if they fail to respond to notices or inform their former employer of an address change.
5. Fiduciary liability: Sponsors want a technology solution that enables the seamless portability of 401(k) account balances to mitigate fiduciary liability related to participants who did not receive guidance to avoid cashing out at the point of job-change or terminated and lost/missing participants whose balances were automatically cashed out or rolled over to a safe-harbor IRA.



Recordkeepers and sponsors play a significant role in facilitating or hindering the portability of 401(k) balances. To improve the process for job-changing participants, they can work together to implement auto portability, a technology solution that enables the seamless movement of 401(k) account balances between plans. Auto portability is underpinned by paired "locate" and "match" algorithms that locate and identify participants with multiple 401(k) accounts and begin the process of rolling accounts in former-employer plans into a participant's active account in their current-employer plan.

By adopting auto portability, recordkeepers and sponsors can help job-changing participants retain their savings, reduce cash-outs, and keep balances within the retirement plan system. Additionally, sponsors can provide education and guidance to participants about the importance of consolidating their 401(k) balances and the benefits of auto portability.

In conclusion, the lack of seamless plan-to-plan asset portability contributes to high cash-out rates among job-changing participants, leading to long-term consequences on their retirement security. Recordkeepers and sponsors can work together to improve the portability process by implementing auto portability and providing education and guidance to participants. By doing so, they can help job-changing participants retain their 401(k) savings, reduce cash-outs, and improve the overall retirement system.