Preventing retirement plan “leakage” through the widespread adoption of auto-portability appears to be the next industry target now that SECURE 2.0 has passed.
The Employee Benefit Research Institute (EBRI) finds that job-switching Americans lose $92 billion in retirement savings yearly to taxes and penalties from premature cash-outs. It’s mainly seen in workers with less than $5,000 in their accounts, making the case for the widespread implementation of the next step in the auto revolution.
Retirement Clearinghouse has advocated for auto-portability for some time, and last fall announced a consortium of workplace major retirement plan recordkeepers—Fidelity, Vanguard, and Alight Solutions—dedicated to the concept.
“A joint venture is a great way to think about Portability Services Network,” Retirement Clearinghouse President and CEO Spencer Williams said. “It’s an independent entity that acts as a utility. The nature of any utility is to benefit its people without a profit motive of its own.”
Williams explained that its scale (40%-plus market share at inception) means it can reasonably project volume and predict when it will hit various benchmarks to reduce participant cost.
“If you think about it from a record keeper’s perspective, Fidelity, Alight, and Vanguard can and are taking auto-portability out to their customer base,” he added. “Since the announcement, we’ve concentrated on filling board seats. Vanguard is finishing its technology implementation, and Fidelity will be done by June 30. We expect to have the beginnings of reportable activity by the end of the year.”
Retirement Clearinghouse is focused on helping traditionally marginalized and underserved communities, a stated aim of its chairman, billionaire entrepreneur and BET founder Robert Johnson. EBRI notes widespread auto-portability adoption could save 67 million Black and minority workers $619 billion, and 42 million female workers of all ethnicities could save $365 billion.
“Bob Johnson set up a private equity company after he sold his interest in BET,” Williams said. “One of the things he said publicly was, ‘I’d like to use my wealth to invest in businesses to help my community.' As we dug into the cash-out leakage problem, we discovered that immediate leakage accounts for 55 out of every 100 accounts cashing out. Beyond that, 25 to 30 residual accounts are also cashing out. So, 75 to 80 out of every 100 accounts with less than $5,000 are leaving the system and paying taxes and penalties.”
Those small accounts quickly add up with 5.5 million people changing jobs each year who have less than $5,000.
“When researching who is cashing out, we discovered massive overlays in eight of the 10 accounts that cashed out. Black Americans were cashing out at a rate of about 165% higher than the rest of the population. For all minority groups, it was still at about 150%.”
They further found that women were cashing out at 135%.
“Finally, there was a big overlay with lower income,” Williams concluded. “And these are the people with a 401(k) plan; we’re not even talking about the people who don’t have a 401(k) plan. It just reinforced the significant policy implications of creating this new default called auto portability. Just like all our autos, what is it about? Changing behavior.”
