woman sitting on empty land on her suitcase waiting (Photo: Shutterstock)

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The COVID-19 crisis has created a situation where tensof millions of American workers are in danger of seeing theirretirement savings depleted and has led to extreme disruption indaily life, financial markets, and the economy—especiallyemployment.

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As of May 28, more than 40 million Americans filed claims forunemployment benefits in the previous 10 weeks. The deadlycombination of levels of unemployment not seen since the GreatDepression, a significant market downturn, and the ongoing problemof severe friction in plan-to-plan portability foretells seriousimplications for retirement outcomes.

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Companies forced to lay off employees in recent weeks could bevulnerable to liability since, as fiduciaries, they have aduty to act in the best interests of participants. Years from now,terminated employees could choose to sue when they discover thattheir retirement income was adversely affected by an automaticrollover or automatic cash-out.

Consider the circumstances

Americans laid-off due to the pandemic may have difficultyfinding  new employment until lockdowns and otherrestrictions subside, and the economic recovery begins. For now,their retirement savings may remain in their former employers'defined contribution plans, unless cashed out to pay for emergencyor basic living expenses. Recent market losses will likely havecaused 401(k) account balances for many active and terminatedparticipants to decrease.

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However, if a terminated participant's 401(k) balance is lessthan $5,000, their former employer has the right to automaticallyroll their savings into a safe-harbor IRA. Under theEconomic Growth and Tax Relief Reconciliation Act of 2001, the onlydefault investment choices permitted for safe-harbor IRA accountholders are principal-protected products.

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The historically low interest rates of the past decade led theseinvestment options to yield meager returns long before "socialdistancing" became part of our national lexicon. Now, with interestrates set at zero for the foreseeable future, most of theseproducts are yielding 0.001% annually, or $1 for every $1,000invested.

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Meanwhile, if a terminated participant's 401(k) balance declinesto below $1,000, their former employer can automatically cash outthe entire sum.

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In all cases, sponsors must send noticesabout automatic cash-outs to terminatedparticipants. To avoid uncashed checks, which leads to theinability of the participant to take control of those retirementsavings, sponsors should be sure that all participants' addressesare current in the files of the plan recordkeeper. Fortunately forplan participants and sponsors alike, a technology solutiondesigned to prevent this scenario has been live for nearlythree years.

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Auto-portability has put an infrastructure in placethat enables sponsors and their recordkeepers to seamlessly movesmall-balance terminated participant 401(k) savings to an activeaccount in their current employer's plan at the point ofjob-change.

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The auto-portability service is underpinned by "locate"technology and a "match" algorithm which work in tandem to identifyinactive accounts, find the accountholder's active account, andbegin the process of consolidating the inactiveaccount balances into the participant's active account in theircurrent employer's plan.

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Plan sponsors can elect an auto-portability configuration thatallows the balance to remain in the prior-employer plan until theparticipant's new-employer plan is found.

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This means that a laid-off participant who may take many monthsto find a new job will have their retirement balance stay where itis until the participant is enrolled in a new plan, avoiding themessy problems with forced cash-outs or safe-harbor IRAs.

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The automation of plan-to-plan asset portability helps sponsorsand recordkeepers track down lost ex-employees without-of-date addresses, and prevent recently terminated employeesfrom going missing in the first place.

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Once laid-off employees find new jobs, auto-portabilitycan facilitate the efficient consolidation of their 401(k) accountbalances into their new employers' plans.

Encourage participants to just say 'No' to cash-outs

Just as importantly, auto portability can help participantsavoid the destructive decision to cash out their 401(k)savings. Without assistance, participants often find the process ofrolling their 401(k) accounts complex, costly, andtime-consuming—leading too many workers to perceive cashing out asa far easier option.

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Furthermore, the jobless-claim filers who have been laid offduring the pandemic may be tempted to prematurely cash out all, orpart, of their 401(k) savings to meet emergency healthcareexpenses, or pay monthly bills they no longer have the income tocover. This is understandable in the present circumstances.

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Although the Coronavirus Aid, Relief, and EconomicSecurity (CARES) Act stimulus package eases tax and earlywithdrawal penalties on 401(k) cash-outs during this time, andtemporarily doubles the maximum amount forloan-related 401(k) withdrawals, Americans shouldn't beencouraged to tap into their retirement savings unless all otherpotential sources of emergency liquidity have been exhausted.

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Participants who cash out forfeit what the sums they receive nowwould have accrued had they remained invested in the U.S.retirement system. Our research finds that a hypothetical30-year-old who cashes out $5,000 in 401(k) savings today wouldlose up to $52,000 in earnings that balance would have yielded forthem at age 65, assuming the 401(k) account it came from would haveincreased by 7% per annum.

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Cashing out 401(k) savings to meet emergency liquidity needs inthe short term can decrease income in retirement over the longterm.

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Indeed, in a recent survey conducted by The Harris Poll onbehalf of the National Endowment for Financial Education, 23% ofrespondents cited not having saved enough for retirement as one ofthe main concerns causing them financial stress at this time—whichis why they should try to obtain emergency liquidity from othersources, if at all possible.

Use time at home to verify addresses of participants

The COVID-19 pandemic reminds us why the adoption of solutionsenabling the institutionalization of seamless plan-to-planportability by more sponsors and recordkeepers across thecountry is needed.

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With lockdowns and social-distancing requirements keeping mostcurrent and terminated employees at home, sponsors andrecordkeepers have an ideal opportunity to focus on making suretheir plan participants' address records are up-to-date.

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In addition, many states and municipalities have enactedexecutive orders placing temporary moratoria on evictions fortenants who can show they can't pay their rent due topandemic-related circumstances and expenses.

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In other words, most plan participants are not moving right now,and won't be until this crisis has abated. Sponsors that have beenforced to make layoffs due to the pandemic should take this time tosend notices to these ex-employees encouraging them to update theiraddresses with recordkeepers if they plan to move after the presentcrisis is over.

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They can also send notices now to recently laid-off participantswith low 401(k) balances explaining what can happen to accountswith less than $5,000 or $1,000, with the confidence that theiraddresses haven't changed yet.

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Sponsors can also begin making inquiries about solutions tooptimize their automatic rollover programs, and assistancefrom roll-in service providers, to avoid losing track ofterminated participants and facilitate the simplified portabilityand consolidation of their strandedaccounts when the post-pandemic recovery starts.

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Now is the time to take the first step toward institutionalizingportability, and helping millions of American workers strengthentheir retirement-readiness.

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Spencer Williams is Retirement Clearinghouse'sFounder, President and CEO. Retirement Clearinghouse is aspecialized provider of portability and consolidation services forAmerica's mobile workforce and has serviced more than 1.3 millionjob-changing participants during Williams' 11 year tenure with thecompany.  

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