Lockdowns, layoffs and furloughs dominated the early days of the pandemic. And two years later, the trickle-down effects of these world-altering events are still impacting the workforce.
The tumult created by COVID-19 led many Americans to reevaluate their careers. Today, millennials are considering major career changes. Baby boomers are retiring early. And Gen Z, the newest addition to the workforce, are rapidly quitting their jobs, women even more so than their male counterparts.
As the economy has bounced back from the lows of the pandemic, the number of job openings has skyrocketed, creating a buyers’ market for job-seekers. Quite simply, there are more job openings than available workers to fill them. Employers are offering more flexible work arrangements and increasing compensation targets to attract new workers in this competitive job market. As a result, workers are also leaving jobs for opportunities elsewhere at unprecedented levels.
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This squeeze has resulted in a trend that has been dubbed “The Great Resignation.” It provides a golden opportunity for defined contribution plan sponsors and recordkeepers to adopt seamless plan-to-plan asset portability. This would ensure workers participating in the Great Resignation maintain access to the 401(k) savings accounts in their former employers’ plans during their breaks (and when they eventually find new jobs or open their own businesses).
Since auto enrollment has become more popular, plan sponsors are facing a proliferation of small terminated accounts with balances of less than $5,000 as turnover increases. That’s exacerbating already out-of-control missing-participant and uncashed-check problems. That is, unless they adopt portability measures to mitigate the problem.
Implementing technology solutions that enable retirement-savings portability can help prevent plan participants who are quitting their jobs from forgetting about the 401(k) savings accounts they leave behind. This would ensure that their under-$5,000 balances don’t wind up automatically transferred to safe-harbor IRAs (or in the case of under-$1,000 balances, automatically cashed out).
According to the Employee Benefit Research Institute (EBRI), an estimated 14.8 million plan participants switch jobs every year, and data from the largest plan recordkeepers shows nearly one-third (31%) of these participants prematurely cash out their small 401(k) savings accounts within one year of starting at their new employers. Workers between ages 20 and 29, which include many Gen Z members quitting their jobs, are 44% more likely to cash out their 401(k) accounts after changing jobs, and participants who earn $20,000 to $30,000 in annual income are 50% more likely to do so.
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Prematurely cashing out a 401(k) savings account is one of the most destructive decisions a retirement-saver can make. The Center for Retirement Research at Boston College reported in a study that, on average, premature withdrawals reduce overall 401(k) savings for retirement by as much as 25%.
Auto portability was created to help participants avoid the temptation to cash out after quitting their jobs or switching employers. It involves the routine, standardized and automated movement of an inactive participant’s retirement savings account with under $5,000 from a former employer’s retirement plan to an active account in their new employer’s plan. Auto portability is powered by “locate” technology and a “match” algorithm to identify a holder of an inactive account, and begin the process of rolling over the balance to an active account in the participant’s current-employer plan.
When participants who quit during the Great Resignation eventually land on their feet, the auto portability solution will enable plan sponsors and recordkeepers to keep track of them. This will help these Americans increase their retirement savings, while reducing fiduciary liability for sponsors and recordkeepers.
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According to a 2017 case study by Boston Research Group, a large plan sponsor in the healthcare services industry cut cashouts across all account balances by about half just four months after adopting auto portability. The case study also found that this sponsor was able to increase its plan participants’ average account balance by 48% during that same period.
In addition, EBRI estimates that if auto portability were to be broadly implemented 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 extra savings would include about $191 billion for about 21 million Black Americans and $619 billion for all minority workers.
Ultimately, the Great Resignation offers defined contribution plan sponsors and recordkeepers a chance to demonstrate their commitment to the financial wellbeing of participants and strengthen the overall wellbeing of their plans. Auto portability has been live for four-and-a-half years, providing sponsors and recordkeepers with a technology solution that has a viable track record of improving outcomes for plans and participants alike.
