Leakage is a term applied to 401(k) plans; namely, themoney left behind in an old 401(k) savings plan when an employeestarts a new job and enrolls in a new 401(k). (Photo:Shutterstock)

To paraphrase the late R&B great Edwin Starr: Leakage – whatis it good for? Absolutely nothing!

But leakage doesn't just refer to water pipes in need of repair.The term can also be applied to 401(k) plans; namely, money leftbehind in an old 401(k) savings plan when an employee starts a newjob and enrolls in a new 401(k).

How serious a problem is this? A 2015 report by the Center for Retirement Research atBoston College found that 401(k) plan leakage causes a 25 percentreduction in aggregate retirement wealth.

In an October 2017 report, the Government Accountability Office(GAO) found that 25 million participants in workplace plansseparated from an employer and left at least one account behindfrom 2005-15, while “millions more” left behind two or moreaccounts.

Help may be on the way in the form of auto-portability – thestandardized and automated movement of an inactive participant'sretirement account from a former employer's retirement plan totheir active account in a new employer's plan.

In 2017, the Employee Benefit Research Institute (EBRI) statedthat if all participants with less than $5,000 in their retirementaccounts had their account automatically rolled over to a newemployer, they would collectively have an additional $1.5 trillionin retirement savings by age 65. Surely, this would make asignificant impact on what the EBRI refers to as the nation's $4.1trillion Retirement Savings Shortfall (RSS).

On February 7, EBRI's research director Jack VanDerhei wrotethat auto-portability “would help keep the DC [definedcontribution] assets in the retirement system and — in theory —reduce leakage from cashouts upon employment termination.”

The impact of auto-portability was particularly impressive amongthe lowest income quartile, “given their lower account balances andthe negative correlation between account balances and cashoutactivity,” VanDerhei wrote.

He went on to note that auto-portability's results were“dramatic for males in the lowest income quartile with only 11-20years of plan eligibility” requiring a 3.1 percent defined benefitaccrual rate to reach equivalency — an increase of 82 percent overthe baseline accrual rate of 1.7 percent.

Spurring all this discussion of late is a November 7 request for public comment published by theDepartment of Labor on a proposed auto-portability rule that wouldapply only to account balances of less than $5,000.

The DOL is seeking to exempt Retirement Clearinghouse (RCH) fromcertain restrictions under the Employee Retirement Income SecurityAct of 1974 and the Internal Revenue Code; that proposed exemptionwould clarify fiduciary liability for sponsors when they addauto-portability as a default process, and arguably introducewidespread adoption of the practice.

RCH's auto-portability mechanism identifies plan participantswho have left an employer, rolls their small 401(k) accounts intoan IRA, detects when the person has joined a new employer, and thenautomatically rolls the money into that individual's new 401(k)plan. The firm has said that it would likely charge a few dollars amonth in custodial fees for the holding period between plans, and amaximum of $59 for the electronic transfer to a new plan. RCH'sprocess would maintain those small balances in an IRA for as shorta period as possible before transferring them to the new plan.

Public comment in response to the DOL's request, which ranthrough December 24, was reportedly very positive, with approvalvoiced by such organizations as the American Retirement Association(ARA), the American Association of Retired Persons (AARP), theAmerican Benefits Council, and the U.S. Chamber of Commerce.

The matter is now in the hands of the DOL's Employee BenefitsSecurity Administration's Office of Exemption Determinations, whichwill consider the public comments; determine whether revisions areindeed necessary; and will ultimately approve of, or reject, RCH'sproposed exemption. That process is expected to be completed byApril.

Others in the industry are strongly in favor ofauto-portability. The millions of dollars being lost to leakagemust be addressed … just as Edwin Starr (kind of) sang.Richard W. Rausser has more than 25 years ofexperience in the retirement benefits industry. He is Senior VicePresident of Client Services at Pentegra, a leading provider of retirementplan, fiduciary outsourcing and institutional investment servicesto organizations nationwide. Rausser oversees consulting, productdevelopment, marketing and communications, BOLI and non-qualifiedbusiness development and actuarial service practice groups atPentegra. He is a frequent speaker on retirement benefit topics; aCertified Pension Consultant (CPC); a Qualified PensionAdministrator (QPA); a Qualified 401(k) Administrator (QKA); and amember of the American Society of Pension Professionals andActuaries (ASPPA). He holds an M.B.A. in Finance from FairleighDickinson University and a B.A. in Economics and BusinessAdministration from Ursinus College.