What is Retirement Plan Auto Portability? Retirement Plan Auto Portability is the concept of rolling-over employee retirement accounts when an employee leaves a company and starts to work for another company with a qualified retirement plan.
The Employee Benefit Research Institute (EBRI) estimates that if Americans were able to effortlessly, automatically roll their 401(k) balance over to a new employer every time they switch jobs, they would have an additional $2 trillion in retirement savings by age 65. The total value of American’s retirement savings is approximately $14 Trillion. This is a massive sum of money and it has prompted a movement among public and private groups to address this issue.
Considering that roughly 50% of American workers do not participate in a company-sponsored retirement plan (either by choice or because it’s not offered by the employer), this makes the $2 Trillion transition loss even more profound.
Why is portability an issue?
- Mobile Workforce: America’s workforce is more mobile than ever before, changing jobs, on average, over 7.4 times during their working career, resulting in an estimated 13.6 million annual job-changers with retirement accounts.
- Explosion of Small Accounts:
- Over 5 million of these participants (28% of annual job changers) have less than $5,000 in their account and are subject to a mandatory distribution from their former retirement plan into a Safe Harbor IRA.
- An additional 2 million participants (18% of annual job changers) have less than $15,000 in their account at the time of their job change.
- Adverse Outcomes: Small-balance, job-changing participants are making poor decisions, creating adverse consequences for their retirement savings and readiness.
While portability may seem like a larger problem outside of the control or influence of individual plan sponsor, all companies will experience a significant employee turnover based on the figures above. So the issue of auto portability has a very direct and profound effect on a sponsor’s ability to help employees reach optimum outcomes for retirement.
“Auto portability is needed now more than ever to help tens of millions of hardworking Americans improve their retirement readiness,” says Spencer Williams, president and CEO of Retirement Clearinghouse. Mr. Williams is an occasional contributor to 401kTV and is a participant in the video below.