The 2006 Pension Protection Act addressed several perceived limitations of 401(k) plans, paving the way for solutions like automatic enrollment, auto-escalation and the use of target date funds as investment options. These things increased participation rates, encouraged savings and optimized asset allocations.
But according to a new issue brief from the Employee Benefit Research Institute, no solution has been forthcoming to address 401(k) cashout leakage. Each year, some four in 10 plan participants who leave their jobs elect to prematurely cash out 15% of plan assets.
EBRI estimated that $92.4 billion was lost in 2015 because of leakage from cashouts. This is a problem that affects the potential of 401(k) plans to produce adequate income replacement in retirement, it said.
EBRI researchers analyzed the effect of auto-portability, whereby a participant’s account from a former employer’s retirement plan would be automatically combined with their active account in a new employer’s plan.
They found that this would help keep the defined contribution assets in the retirement system and — in theory — reduce leakage from cashouts when employment is terminated.
Considering auto-portability as a standalone policy initiative, EBRI projected the present value of additional accumulations over 40 years resulting from partial auto-portability (participant balances less than $5,000 adjusted for inflation) would be $1.5 trillion, and for full auto-portability (all participants’ balances) just about $2 trillion.
Under partial auto-portability, the research projected those currently in the 25-to-34 age group would have an additional $659 billion, increasing to $847 billion for full auto-portability.