Considering Auto Portability Rather Than Small Plan Cashouts

An advisory opinion and prohibited transaction exemption from the Department of Labor (DOL) has cleared the way for automatic portability programs in which retirement savings accounts can be automatically rolled from one plan to another for participants who terminate employment. The actions were specific to Retirement Clearinghouse’s system.

In an analysis of legislative proposals, the Employee Benefit Research Institute (EBRI) provided stats that showed auto portability would decrease retirement savings shortfalls for all age cohorts or plan participants.

According to a recent Issue Brief from EBRI, each year approximately 40% of terminated participants elect to prematurely cash out 15% of plan assets.  For 2015, EBRI estimates that $92.4 billion was lost due to leakages from cashouts.

Considering auto portability as a standalone policy initiative, EBRI projects the present value of additional accumulations over 40 years resulting from “partial” auto portability (small balance cashouts of participant balances less than $5,000 adjusted for inflation) would be $1.5 trillion, and the value would be nearly $2 trillion under “full” auto portability (all terminated participant balances regardless of asset level). Under partial auto portability, those currently 25 to 34 are projected to have an additional $659 billion, increasing to $847 billion for full auto portability.

EBRI says the impact of full auto portability would be significantly larger for younger cohorts who would have more time to benefit from the cessation of cashouts. Focusing on participants ages 35 to 39, the size of their deficit would decline by 17% for those with one to nine years of future eligibility in a defined contribution (DC) plan, 19% for those with 10 to 19 years of future eligibility, and 23% for those with 20 or more years of future eligibility

Although those closest to retirement would see a smaller impact, it is not small change. EBRI says participants currently 55 to 64 are projected to have an additional $41 billion under the partial auto portability scenario. Under the full auto portability scenario, they would have an additional $74 billion.