On Monday April 22, we will mark the 54th annual Earth Day to celebrate our planet's natural surroundings and contemplate how we can help preserve them. The advent and ongoing expansion of recycling programs has enabled society to reduce waste. Although we still have a long way to go, it's a step in the right direction beyond post-World War II throwaway culture.
The U.S. retirement system also has experienced significant 401(k) asset waste in recent decades. Lack of a seamless process for moving retirement savings from one employer's sponsored plan to another, coupled with a highly mobile American workforce and expansion of automatic enrollment under the
The Employee Benefit Research Institute (EBRI) estimates that $92 billion in assets leak out of the U.S. retirement system every year. EBRI research determined that the cause of the vast amount of this cash-out leakage occurs as a result of plan participants switching jobs.
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Under the SECURE 2.0 Act, the balance limit on stranded 401(k) accounts from former participants that plan sponsors are allowed to automatically roll into
Without a solution for altering this trend, the SECURE 2.0 provision runs the risk of expanding asset waste in the proverbial 401(k) landfill. Harnessing data from the U.S. Department of Labor as well as EBRI and the largest recordkeepers, we have found that an estimated 6.7 million participants with under-$7,000 401(k) accounts will change employers this year. But on top of that, on a one-time basis beginning in 2024, estimate that 1.1 million terminated-participant accounts with small balances could instantly become eligible for movement into safe-harbor IRAs.
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The solution to this recycling problem is simple: auto portability, the routine, standardized and automated movement of an employee's retirement savings account (now with less than $7,000) from their prior employer's plan into an active account in their current employer's plan. It was created with assistance and input from both private and public sectors to help participants and plans "recycle" their 401(k)s instead of allowing them to end up in a digital landfill.
The expansion of this 401(k) recycling solution received a big boost in November 2023, when the Portability Services Network — an industry utility co-founded by the industry's largest recordkeepers and RCH — went live. PSN's primary mission is to enable widespread adoption of auto portability.
If PSN's efforts are successful and auto portability is adopted nationwide we estimate that over the next 40 years cash-out leakage from the U.S. retirement system would decrease by $355 billion. And, the same scenario would preserve an additional $1.6 trillion in savings in the U.S. retirement system at the end of the 40-year period, including $216 billion in more retirement savings for 30 million Black Americans.
While much still needs to be done, recycling programs and other sustainability initiatives have done a lot to reduce waste and raise the awareness of the need to do so. The retirement services industry and plan sponsors have an opportunity to reduce the cashed-out and safe harbor IRA asset waste in the U.S. retirement system.
