The 401(k) System: Facing Portability Challenges and Retirement Account Losses
The 401(k) retirement savings plan, introduced in 1978, is facing significant challenges related to portability and lost accounts. Despite its prevalence, only 50% of workers have access to 401(k) plans through their employers.
Portability Failure: A Major Concern
Laurie Rowley, co-founder and CEO of Icon, highlights the shortcomings of the 401(k) system in terms of portability. The plan was not designed to accommodate today's mobile workforce, leading to issues with account transfers and lost funds.
Four common outcomes occur when employees leave employers with 401(k) plans:
* Leaving Funds Behind: 25% of 401(k) assets are abandoned or lost, representing 29 million individuals.
* Rolling Over to IRAs: $800 billion has been transferred from 401(k) plans to IRAs.
* Transferring to Employer Plans: A small number of employees roll their 401(k) balances into their new employer's plan, but this process can be cumbersome.
* Cashing Out: Employees may withdraw funds from their 401(k) plans, a decision that carries potential tax and penalty consequences.
Rowley emphasizes that these portability failures stem from the fact that the 401(k) plan was not intended to be portable. The patchwork systems in place for rollovers are often inefficient and prone to errors.
Individual Solutions to Address Portability
One recommended solution for addressing portability issues is to roll over 401(k) funds into an Individual Retirement Account (IRA). This allows individuals to maintain control of their retirement assets and avoid losing track of accounts.
Rowley also introduces the Portable Retirement Plan (PRP) offered by her firm, Icon. The PRP functions similarly to a traditional 401(k) plan, but it eliminates the cost and complexity for employers while providing fiduciary responsibility for the participant. This ensures portability and eliminates the need for rollovers.