401(k) Auto Portability Can Improve Outcomes

401(k) auto portability could not only improve outcomes, but it can also help reduce fiduciary risk.  Automatic cash-outs of 401(k) plan balances of less than $1,000 are a problem for plan sponsors and participants.  At issue is uncashed checks for balances under $1,000, which can be a fiduciary liability for plan sponsors.  401(k) auto portability gives participants a chance to increase their retirement savings because it would create less of a need for automatic cash-outs.  401(k) auto portability is also a solution that can help plan sponsors reduce their fiduciary risk!

We observed 401(k) Plan Auto Enrollment can help plan participants by a small plan design change.  (Click below to see how a recent TPSU Program attendee at UC Irvine, Joe, HR Director of a 420 employee firm outlines how Auto Enrollment put their plan participants on the road to financial freedom.)


The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 gave sponsors the ability to automatically roll terminated participant accounts with less than $5,000 into safe harbor IRAs.  Under the same legislation, sponsors can also cash out former employees’ accounts with balances of less than $1,000.

Plan sponsors deal with automatic cash-outs more often that you might think.  Around 1.6 million Americans who change jobs leave their 401(k) accounts with their former employers with less than $1,000 in them, according to the Employee Benefit Research Institute (EBRI), cited recently in Employee Benefit News.  Additional data cited in EBN found that data from multiple years from a plan sponsor with more than 250,000 participants shows that 10.5% of the checks from these accounts with under $1,000 will go uncashed.  And that’s just checks requested by participants who decided to cash out their 401(k) accounts voluntarily.  For those under-$1,000 balanced cashed out involuntarily – meaning without participants requesting it – the percentage of uncashed checks is likely much higher.

Part of this has to do with missing addresses for participants.  At least 1.3 million 401(k) accounts have lost or missing participants, according to 2018 research from Boston Research Technologies, again cited in EBN.  In addition, that same survey found that nearly 33% of participants learned of a savings account in a former employer’s retirement plan they didn’t even know they had.  These missing addresses are an unintended consequence of auto enrollment, which while created to help combat employee inertia and improve retirement savings, also didn’t account for high instances of workforce mobility and a lack of seamless portability of retirement savings between employers and plans.

401(k) auto portability comes to the aid of plan sponsors.  401(k) auto portability, has the potential to help mitigate sponsors’ fiduciary risk and reunite more participants with their hard-earned savings.  According to EBN, “Auto portability is the routine, standardized and automated movement of an inactive participant’s retirement savings account, with less than $5,000, from a previous employer’s retirement plan to an active account in their current employer’s plan.  The solution’s ‘locate’ feature automatically pinpoints a participant’s current, active account, working in tandem with its ‘match’ algorithm to begin the consolidation process.”  According to the same Boston Research study cited above, the locate feature has a 92% probability of accurately identifying an active participant address record.

401(k) auto portability has the potential to reduce fiduciary liability for plan sponsors by reducing, and even eliminating, automatic cash-outs of 401(k) account balances of less than $1,000.  It also has the potential to make sure participants retain their retirement savings, which could vastly improve outcomes.  As EBN aptly noted, “Now that’s a winning formula for everyone.”


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