New research suggests that participants prefer preserving their small-balance retirement savings accounts and respond favorably to consolidating their accounts through auto portability.
A Boston Research Technologies report documenting the key findings from auto portability's market launch with a large plan sponsor finds that, given an easy option of consolidation, the vast majority of respondents preferred to retain these balances and roll them forward, even when paying for the service.
“Making the Right Choice the Easiest Choice: Eliminating Friction and Leaks in America's Defined Contribution System” examines the behavior of more than 3,000 active participants in the plan also holding a small-balance safe harbor IRA with Retirement Clearinghouse. The findings from the initial launch cover the period July through October 2017, during which more than 400 participants consented to have their safe harbor IRA balance automatically rolled into their active 401(k) plan account.
After being notified of their eligibility to have their IRA rolled into their active 401(k) account for a small fee, the study found that:
- 15% of participants responded to the notification during the first four months of the program;
- 91% of respondents gave their consent and had their savings consolidated in their current employer’s plan;
- 55% of the IRA balances rolled in were below $1,000; and
- only 9% of participants opted out of the program.
The authors suggest that these results “dispel the myth that small-balance accounts are ‘expendable’ and call into question the common practice of automatically cashing out terminated participant balances below $1,000.”
In addition, the report shows that upon consolidation, workers’ median plan account balance increased by 46% and the combined future value of their preserved savings was more than $3 million at normal retirement age. And while 85% of participants with matched accounts did not respond to the roll-in offer, their lack of response was likely the result of “self-destructive behavior or lack of knowledge about where to start rather than a preference to cash out,” the report suggests.
“One important finding is that auto portability helps participants overcome the structural frictions embedded in the consolidation process, making the decision to roll in as easy as the decision to cash out,” says Warren Cormier, founder and CEO of Boston Research Technologies. “We can also observe that a mechanism is needed to surmount the remaining cognitive frictions, such as procrastination, hesitation, and indecision.” Cormier suggests that a negative consent mechanism could help preserve billions of dollars in retirement savings that are currently being cashed out by participants.