A great deal has changed over the past half-century since President Gerald Ford signed the Employee Retirement Income Security Act into law. Who would have guessed in 1974 that
Today's workforce is much more mobile, with the Employee Benefit Research Institute (EBRI) estimating that the average American will have 9.9 jobs throughout 45 years of working. This modern trend made it necessary for the private and public sector members who came together at the
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The ability for employees to seamlessly move 401(k) and other defined contribution plan savings from one job to another didn't exist for a long time. The first 401(k) emerged in 1978, and in the 1980s, 401(k)s became much more participant-centric with the incorporation of daily valuation into those plans. After all, that same decade saw the explosion in mutual funds, so naturally retirement-savers were going to begin asking to see the daily value of their 401(k) accounts, as well as their mutual fund investments.
While the selection of funds that plan sponsors could offer participants greatly expanded due to this development, it also led to more passivity among participants with regard to their 401(k)s. Put simply, most plan participants weren't, and still aren't, experts in investing. Those who found the investment options to be too complex tended to allow their accounts to sit in a plan's default investment vehicle (in most cases, a money market fund), or didn't sign up to take part in their employers' 401(k)s at all.
These circumstances resulted in retirement service providers finding ways to automate functions for helping participants take actions that are in their best financial interest. A prime example is automated enrollment, which is designed to give employers the ability to automatically sign up new and existing employees for participation in their plans. But while automated enrollment was created to make inertia work for participants, instead of against them, it also led to a spike in small, stranded 401(k) accounts that participants couldn't easily take with them when they left one employer for another.
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Inappropriate asset allocation was another area where participant action, or inaction, was hurting outcomes. Participants simply didn't invest appropriately despite the reams of communication material dumped on them by their plans' sponsors and recordkeepers. Soon, investment advice, account rebalancing and target-date funds were introduced in plans to make appropriate investing easier for participants.
Auto enrollment and use of target-date funds soared after the
But in a highly mobile workforce, how were these participants supposed to move their 401(k) savings from one plan to another when they changed jobs? Historically, there was no seamless process for participants to move their 401(k) savings from their former employer's plan into an active account in their current employer's plan. Without the technology infrastructure and standardized operations that enable plan recordkeepers to exchange information and move accounts, the process was slow, cumbersome and costly.
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Many participants found it easier to prematurely cash out their savings when they parted ways with an employer, or leave their 401(k) savings behind. The problem got so bad that EBRI estimates $92 billion leaves the U.S. retirement system every year, with most of this asset "leakage" the result of
With the formation of the
Our own research indicates that $1.6 trillion in extra savings would be preserved in the U.S. retirement system if auto portability were to be adopted nationwide over a 40-year time frame. That additional savings includes $216 billion in more retirement income for 30 million Black Americans.
The youngest Baby Boomers, born in 1964, turned 60 in 2024 – and the oldest members of Generation X, born in 1965, will hit the big 6-0 in 2025. Fifty years after the introduction of ERISA, we can appreciate how much technology innovation in the ensuing decades has made it easier for these Americans, and their younger cohorts, to save more for retirement.
