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The 401(k) retirement plan, initiated in 1978, is increasingly becoming inadequate in the face of modern workforce dynamics and various operational challenges.
Research indicates that approximately only 50% of the American workforce has access to these plans through their employers. Laurie Rowley, co-founder and CEO of Icon, a firm focused on retirement solutions, points out that the current system fails to adapt to the realities of a mobile job market.
The consequence of this disconnect is manifesting in troubling patterns of account portability and lost retirement assets. In a recent discussion on Decoding Retirement, Rowley emphasized these significant flaws in the US retirement system.
“The 401(k) plan was never designed with portability in mind,” Rowley noted. Despite various existing solutions for managing it, she remarked that such systems often fall short.
Rowley explained the fate of employees when they leave an employer with a 401(k). Quite commonly, several scenarios arise. For instance, many individuals simply leave their 401(k) behind, resulting in about 25% of total assets in such plans becoming abandoned or lost—translating to around 29 million Americans who can no longer locate their retirement savings. “When they walk away from it, they forget where it is,” she clarified.
Alternatively, a substantial amount, approximately $800 billion, has been transferred from 401(k) plans into Individual Retirement Accounts (IRAs).
A select few choose to roll their funds into their new employer’s 401(k) plan, although Rowley pointed out that the process of doing so can be complicated.
Some employees opt for the more straightforward route of cashing out their 401(k), which Rowley views as a critical failure within the portability framework of these plans. “It’s unrealistic to expect individuals to make informed decisions about their retirement savings every time they transition to a new job,” she argued. “This asset is often the most significant one in their lives, and we’re asking them to reassess it each time they change employment, leading to complications.”
Rowley advises that one viable option for addressing the challenge of portability is rolling over 401(k) funds into an IRA before leaving an employer.
“I strongly recommend that individuals take their retirement plans with them,” she stated. “Transferring funds from an employer’s plan into an IRA provides personal management and oversight.”
This strategy allows individuals to maintain visibility into their investments, monitor fees, and adjust their portfolio without the risk of losing their retirement savings. “People should carry that financial asset with them throughout their lives,” she emphasized.
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Rowley’s firm has proposed a solution termed the Portable Retirement Plan (PRP), which mirrors a traditional retirement plan while integrating individual account ownership.
“It’s a blend of an employee workplace retirement plan and an individual account,” she explained. “We find that when employees save through their workplace, it significantly enhances their financial standing.”
The innovative feature of the PRP is that it reduces both the administrative costs for employers and complexity associated with managing these plans. As Rowley noted, under this model, the plans are set up on Icon’s platform, transferring fiduciary responsibility entirely to the firm.
“With this approach, we can tailor a personalized investment portfolio for each participant, and the savings are directed into their own accounts, akin to an IRA,” she detailed.
This method, Rowley argued, provides a seamless experience for employees, allowing them to take their retirement plans along when they transition jobs, thus negating the cumbersome process of rolling funds over.
“There’s no need to adjust your investments,” she affirmed. “You simply disconnect from your employer and maintain access to your account at your next job.”
Each Tuesday, retirement expert and financial educator Robert Powell equips listeners with essential planning strategies on Decoding Retirement. Discover more episodes on our video hub or enjoy on your preferred streaming service.
Source
finance.yahoo.com