By Spencer Williams | April 29, 2021
Financial wellness has taken on a new urgency over the past year as we have witnessed a series of “once-in-a-lifetime” events that affect how we work and save for retirement. In response, many plan sponsors have adopted new and important tools to strengthen the financial wellbeing of their participants.
Plan sponsors’ promised commitment to financial wellness is reflected in recent survey data. This year’s This year’s Defined Contribution Survey published by Callan found that seven in 10 employers with defined contribution plans offer financial wellness support, and 89% responded that they provided a financial wellness program as part of their internal philosophy to support their employees. Callan’s survey also reported that 14% of employers have a standalone financial wellness program, and 36% plan to create one, in order to address plan participants’ top financial needs—retirement savings, emergency savings, and debt management.
These findings from Callan are extremely promising at a time when many American workers and their families are justifiably concerned about their financial wellbeing. While the lack of seamless plan-to-plan 401(k) savings portability has always presented obstacles to maximizing participants’ retirement outcomes, the uncertain labor markets in the wake of the COVID-19 pandemic have contributed to a sense of insecurity when it comes to American workers’ retirement savings.
The Ongoing Danger of Cash-Outs
The Employee Benefit Research Institute (EBRI) estimates that $92 billion leaves the U.S. retirement system every year, primarily due to premature cash-outs of participants’ 401(k) savings accounts at the time of a job-change. The average American worker will switch jobs 9.9 times over a 45-year period, according to EBRI, and the cumbersome and costly nature of moving and consolidating 401(k) account assets at the point of job-change causes many people to cash out their savings, or leave them behind in former-employer plans.
At least 33%, and as many as 47%, of plan participants cash out following a job-change, according to the Savings Preservation Working Group, and most do so within a year of switching employers. Research from the largest industry recordkeepers indicates that minorities and low-income workers are at much higher risk of cashing out—with 63% of Blacks, 57% of Hispanics, and 50% of those with $20,000 to $30,000 in annual income cashing out in the year following their job-changes.
Demonstrating the Fruits of Your Financial Wellness Program
In its Hot Topics in Retirement and Financial Wellbeing 2021 survey, Alight Solutions found that the vast majority of plan sponsors (85%) intend to measure the success of their financial wellness initiatives by the amount of employees utilizing benefits. More than half (55%) answered that they would measure financial wellness success by retirement savings statistics, such as decreased cash-out leakage and higher plan participation rates.
Fortunately for American workers and employers, the private sector developed auto portability as a technology-enabled solution to the ongoing problem of cash-out leakage—and this solution has been proven to increase the metrics that many sponsors intend to use to demonstrate the effectiveness of their financial wellness programs.
Auto portability is the routine, standardized, and automated movement of a retirement plan participant’s 401(k) savings account with less than $5,000 from their former employer’s plan to an active account in their current employer’s plan. The solution is powered by a “match” algorithm and “locate” technology to identify lost and missing participants, and begin the process of rolling 401(k) account balances into active accounts in those participants’ current-employer plans. This is how auto portability, which has been live for nearly four years, can make it easy for participants to take their 401(k) savings with them as they change jobs—while simplifying the mandatory distribution process for small accounts, and eliminating the need to automatically cash out accounts for terminated participants with under $1,000.
Auto portability can provide comprehensive benchmarks for sponsors to demonstrate the helpfulness of their financial wellness programs.
For example, auto portability has also been proven to improve a key plan metric—average account balance. Just four months after implementing auto portability, a large plan sponsor in the healthcare services industry was able to increase the average account balance of participants who leveraged auto portability by 48%, according to a 2017 case study by Boston Research Group.
EBRI estimates that, if auto portability is broadly adopted over a 40-year period, up to $2 trillion (measured in today’s dollars) in additional savings would be preserved in the U.S. retirement system. This sum would include approximately $191 billion in retirement savings for 21 million Black Americans, and $619 billion for all minority participants.
Not only can auto portability help more Americans improve their overall financial wellbeing, but it can also enable employers to easily quantify their financial wellness efforts and meet their fiduciary responsibilities by strengthening their participants’ financial wellness—a win-win for all parties.
If and when the tens of millions of Americans left unemployed due to the pandemic return to work, industry research predicts they will inevitably cash out the 401(k) savings from their former employers’ plans. The same goes for the millions of furloughed workers who may decide to look for alternative employment instead of returning to a former employer.
Plan sponsors should take measures now to get out in front of that problem by adopting an auto portability program for their plans, and take credit for the outcomes by measuring and reporting their participants’ improved financial wellness.