The Impact of Auto Portability on Preserving Retirement Savings Currently Lost to 401(k) Cashout Leakage
Employee Benefit Research Institute (Jack VanDerhei)
Significantly, no effective solution has been implemented to address the problem of 401(k) cashout leakage, which occurs post-termination, where each year approximately 40 percent of terminated participants elect to prematurely cash out 15 percent of plan assets. For 2015, EBRI estimates that $92.4 billion was lost due to leakages from cashouts, representing a serious problem that affects the potential of 401(k) plans to produce adequate income replacement in retirement. This Issue Brief summarizes EBRI research analyzing the impact of auto portability, where a participant’s account from a former employer’s retirement plan would be automatically combined with their active account in a new employer’s plan. This would help keep the defined contribution (DC) assets in the retirement system and — in theory — reduce leakage from cashouts upon employment termination.