In recent months, our attention has been drawn to some deservingpublic policy initiatives that would dramatically expand access toworkplace retirement savings accounts andaddress the “access gap” encountered by millions of Americanworkers who are presently offered no such option.

The access gap is very real.

According to an analysis of the U.S. Census Survey of Incomeand Program Participation, The Pew Charitable Trusts estimates that36.2% of American workers do not have access to either a definedbenefit or defined contribution plan sponsored by theiremployers.

One proposal relies upon legislative action toeliminate barriers to open multiple-employer plans (MEPs) andrequires private employers to auto-enroll their employees in adefined contribution (DC) plan.

Thus, universal access to DC plans could become a reality, andthe access gap would be quickly bridged.

A surge in new participants contributing to employer-sponsoreddefined contribution accounts has substantial benefits. TheEmployee BenefitsResearch Institute (EBRI) has estimated that universal DCaccess could contribute $740 billion towards reducing our nation’s$4.1 trillion retirement savings shortfall.

A tidal wave of cashout leakage and small accounts

There’s just one catch. The introduction of universal DCaccess could generate a veritable tidal wave of retirement savingscashout leakage and small retirement savings accounts.

Here’s why:

• Today, there are approximately 66 million active, contributingdefined contribution plan participants.

• Of these active DC participants, about 14.8 million, or 22%,will change jobs each year.

• Of the 14.8 million annual job-changers, 4.7 million, or 31%million will cash out at separation, paying taxes andpenalties. In the years following separation, another 1.3million will cash out, for a total of 6 million cashouts.

• Over a generation, that’s 261 million participants who’ll cashout.

Those disproportionately affected by the cashout leakageepidemic include millennials, lower income segments and minorities,all of whom cash out in greater numbers than the general populationof DC participants (see chart that follows).

Since these happen to be the very same segments of ourpopulation that the Pew research indicates will benefit the mostfrom expanded access, it stands to reason that a surge ofparticipants with these characteristics could exacerbate theproblem of cashout leakage, all other things remaining equal.

Using our Auto Portability Simulation model, increasingactive DC participants by 36.2% boosts annual participant cashoutsto 8.2 million, a run rate that could drive 357 million cashoutsover a generation -- an increase of 96 million vs. currentlevels.

For plan sponsors, expanding access (particularly in thoseindustries with high employee turnover) could also create aproliferation of small balance accounts left behind by thosejob-changing participants who don’t cash out.

These additional small-balance accounts would create anadministrative burden for plan sponsors, resulting in increasedplan costs, missing participants and uncashed distributionchecks.

The dual problems of cashout leakage and small accounts, if notaddressed, could mean that a program of expanded access couldeventually become a Pyrrhic victory for the defined contributionsystem.

Retirement savings portability: A necessary complement toexpanded access

Fortunately, there’s a perfect complement to expandedaccess: moving retirement savings forward when employeeschange jobs.

A study by Boston Research Technologies indicates thatmost cashouts occur simply because it’s the easiest action forparticipants to take. In fact, only 37% of participants whocash out indicate that the reason is a financial emergency. Providing participants with easy portability of their retirementsavings has been proven to reducecashout leakage by 50%.

EBRI recently conducted an analysis of the value of auto-portability, andfound that it reduced the retirement savings shortfall by $2trillion, when applied to all balances. When applied tobalances less than $5,000, auto portability contributed $1.5trillion.

For plan sponsors, a program of auto-portability would mitigatethe problem of small accounts, serving to raise average balanceswhile promoting plan efficiencies.

However, it’s on the human level that the benefits of reducingcashout leakage are most impressive, where the preservation of evensmall balances can significantly increase a worker’s retirementsecurity:

• The value of preserving $5,000 at age 25 is worth $70,000 atretirement.

• Preserving another $5,000 at age 35 increases the total value to$105,500.

• Preserving yet another $5,000 at age 45 yields $123,600 atretirement.

While it’s clear that whatever can be done to expand access toworkplace retirement savings accounts will be beneficial toAmericans’ retirement security, it’s also equally clear that weshould take steps now to preserve our savings through a program ofretirement savings portability, thus putting an end to the scourgeof unnecessary cashout leakage.