Don’t relegate lost and missing accounts to the lost and found — consolidate them in the retirement system

The Securing a Strong Retirement Act of 2021, nicknamed the “SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0,” was passed unanimously by the House Ways and Means Committee, and many expect the bill to pass the full House of Representatives.

While the bill’s measures are well-intentioned, and we welcome all efforts to close our country’s retirement-savings shortfall, one of the SECURE Act 2.0’s provisions could unintentionally cause Americans to wind up with less income for retirement.

As currently drafted, the SECURE Act 2.0 attempts to prevent the automatic cash-outs of 401(k) savings accounts for terminated participants that have less than $1,000 by requiring those accounts to be sent to a “Lost & Found” operated by the Pension Benefit Guaranty Corp. (PBGC), which would manage and store them.

The goal of the “Lost & Found” is admirable, as it seeks to reduce the long-standing practice (adopted by many plan sponsors) of automatically cashing out those small accounts when participants leave their employers, after deducting penalties and taxes from participants’ savings. And as we have frequently noted, cashing out even small accounts can hurt participants who earned those retirement dollars because they forego a lifetime of earnings on those savings. Those cashed-out participants could also hold sponsors liable for lost savings over the long term—especially if they never received the checks for their less-than-$1,000 balances because their home addresses in a sponsor’s plan records were out of date.

While the Lost & Found would keep small accounts below $1,000 incubated in the U.S. retirement system, the proposed measure falls short in several respects.

It doesn’t resolve the underlying cause of the mushrooming number of small accounts created by the widespread adoption of auto enrollment. The Pension Protection Act of 2006 (PPA) allowed employees to be automatically enrolled in their employers’ 401(k) plans and although employers could automatically enroll employees, the PPA did not include provisions to ease and simplify the process of moving 401(k) savings to new-employer plans as participants changed jobs.

Since the American workforce has become much more mobile in the ensuing years, and the process of 401(k) account movement was (and remains) costly and time-consuming, the introduction of auto enrollment led directly to an explosion of small accounts.

• According to the Employee Benefit Research Institute (EBRI), 41.3% of plan participants in the EBRI/Investment Company Institute database had under $10,000 in their 401(k) savings accounts as of year-end 2015. This was the database’s highest percentage of 401(k) balances with under $10,000 since year-end 2008, during the financial crisis. 
  
• Meanwhile, EBRI also estimates that the average American will hold 9.9 jobs over a 45-year working life. 
  
• In addition, a mobile workforce behavior study conducted in 2015 by Boston Research Technologies found that it takes a participant between five and six weeks from beginning to end, on average, to roll a 401(k) savings account from a former employer’s plan to an active account in their new employer’s plan. According to the study, participants also expect to a roll-in transaction to take up to 19 hours of their personal time to complete, on average. That time isn’t cheap—36% of participants value it from $100 to $500, and 8% value it anywhere from $1,000 to $5,000.   

Taken together, the above trends explain why too many participants leave small accounts behind in former-employer plans when they change jobs.

Don’t waste energy trying to make small accounts disappear

Stranding a small 401(k) account in a former employer’s plan is, unfortunately, not a one-off during the average participant’s working life. EBRI estimates that 14.8 million participants switch employers every year—and the 2015 mobile workforce study by Boston Research Technologies reported that 33% of workers have stranded a 401(k) savings account in a former employer’s plan at least once!

Given how many stranded small accounts remain in the U.S. retirement system, attempting to make them disappear by automatically rolling those with less than $1,000 to the PBGC — while well-intentioned — is not going to produce the best outcomes.

A far more constructive method of preventing the automatic cash-outs of stranded accounts with under $1,000 is to encourage more sponsors to adopt the solutions enabling the movement and consolidation of these accounts into active accounts in participants’ current-employer plans.

Auto portability — the routine, standardized, and automated movement of a retirement plan participant’s 401(k) savings from their former employer’s plan to an active account in their current employer’s plan — has been live for the past four years, and can drive the movement and consolidation of under-$1,000 accounts from terminated participants to their current employers’ plans.

Powered by a proprietary “match” algorithm and “locate” technology, the auto portability solution is also designed to identify and consolidate accounts from lost and missing participants.

If auto portability is adopted across the entire retirement system, EBRI has estimated that up to $2 trillion (measured in today’s dollars) in additional savings would be preserved in the U.S. retirement system — including an estimated $191 billion in retirement savings for 21 million Black Americans, and $619 billion for all minority participants.

Encouraging sponsors to implement the tools to empower auto portability is a more constructive approach to reducing small accounts and preventing automatic cash-outs than automatically transferring them to the PBGC — and the vast majority of participants would welcome this alternative. The 31st Annual Retirement Confidence Survey, conducted by EBRI and Greenwald Research, reported that nearly nine out of 10 workers with access to an employer-sponsored defined contribution plan view auto portability as a valuable benefit.