Bob Johnson has made his fortune—and his place in the history books as America’s first Black billionaire—by disrupting the ways things are done, from cable television to hotels and automobile dealerships. Now the chairman and majority owner of Retirement Clearinghouse and chairman of Portability Services Network has set his sights on changing how American workers save for their later years.
In an interview with WayMaker Journal, he explains how retirement saving works, why it matters, what he is doing to improve the system and how you can benefit.
WayMaker Journal: Let’s start with the basics: what is a 401(k) and how does it work?
Bob Johnson: Simply put, a 401(k) is a retirement savings account which is available to workers through their employers. The key to 401(k)s is that they make saving simple—money goes straight from your paycheck into your retirement savings account. Also, your 401(k) contributions come out of your paycheck before federal income taxes, thereby reducing the amount that is taxed. And you don’t pay taxes on the savings you accrue in your 401(k) until you start to access the money after you retire. As long as you don’t make any withdrawals from your 401(k) before age 591/2, any withdrawals that you make will not incur penalties.
Saving into a 401(k) is a vital part of ensuring you have the money you need.
A 401(k) is convenient because you can select the percentage of your paycheck that you want your employer to automatically deposit into your account. Also, a large percentage of employers are helping their workers save for retirement by automatically starting their 401(k) account, which is commonly called auto-enrollment. In many cases, employers will also match a percentage of your pay that you save into your 401(k), which can significantly increase the income you can enjoy in retirement. It’s important to take advantage of this matching employer contribution—it’s free money, so don’t leave it on the table!
Your 401(k) will also have a variety of investment options and these generally include a series of Target Date Funds (TDFs). These are a blend of funds designed to make investing easy for you. All you have to do is select a TDF that has a date closest to when you plan to retire. That’s it! That fund is managed to provide a level of diversification that is appropriate for the timing you plan to start drawing your money down in retirement.
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WJ: Why should we save money into a 401(k)?
BJ: Traditional pension plans, which provide a monthly income stream in retirement, are much more rare than they used to be and Social Security is not designed to provide sufficient monthly income to support living expenses and medical needs in retirement. Today, saving into a 401(k) is a vital part of ensuring you have the money you need to live comfortably in your retirement. And it’s never too late to start.
Don’t panic and pull your money out when the markets decline.
WJ: What are some of the things that might negatively affect a 401(k) account?
BJ: Like any investment, returns of the account can go up or down as the capital markets move up and down. However, it’s important to stay the course. In other words, don’t panic and pull your money out when the markets decline. Remember, in a down market, you are buying securities at a lower price and will enjoy the gains when the market improves.
Early withdrawals also hurt your retirement savings and ultimately the amount of money you will have when you retire. You will have to pay the taxes that you deferred when you put the money into the 401(k) and if you are younger than 59, you will also have an early withdrawal penalty. That penalty is there because these accounts are intended for use in retirement and are not meant to be used for other expenses. But prematurely cashing out or making that early withdrawal also means those dollars are no longer working in that 401(k) account—the savings and growth expected over time have been forfeited.
WJ: Bob, you have made a very personal commitment to improving the retirement savings outcomes of American workers, but in particular, the outcomes of African American workers. Tell us a little about that.
BJ: I would love to, but let me warn you, it’s a bit of a story, as I want to set the stage a bit.
I said previously that early withdrawals can harm your 401(k) and ultimately your retirement security. One of the key behaviors that gives rise to early withdrawals is the impact of job-changing. Let me explain. Years ago, people worked for the same employer for 30 or more years. That is simply no longer the case. Today’s American workforce is more mobile than ever before. According to the U.S. Bureau of Labor Statistics, in 2022 the median number of years that employees worked for their present employers was just 4.1 years and the youngest Baby Boomers, who were born between 1957 and 1964, held an average of 12.7 jobs between the ages of 18 and 56!
Here is the tie-in to retirement savings. Many of these job-changers leave their retirement savings behind at their previous employer, while many others decide to cash out their savings rather than move them to their current employer’s savings plan. Historically, 401(k) plans have not had an infrastructure that made it easy for people to move their 401(k) savings from their previous employer’s plan to their new employer’s plan after they switched jobs. It was quite a cumbersome process to move and consolidate 401(k) savings accounts, involving a lot of red tape and approvals from different parties, and it was expensive, not just in terms of money but also in terms of time spent. It has been easier for people to just cash out, and unfortunately, Blacks, Hispanics, women and low-wage earners disproportionately cashed out. In fact, about 31% of all 401(k) participants end up cashing out about one year after changing jobs, but Blacks cash out at a rate of 63%!
Auto portability… actively works against the cash-out phenomenon.
Here is where my efforts come into play… I am the chairman and largest shareholder of Retirement Clearinghouse (RCH), a fintech company that designed and developed a process called Auto Portability. The backbone of Auto Portability is a network that allows the automated transfer of 401(k) accounts of $7,000 or less that have been left behind at a previous employer to be automatically transferred to the person’s active 401(k) at their current employer. Auto Portability makes it easy for those savings to stay in the 401(k) system and continue to work towards that person’s retirement. It actively works against the cash-out phenomenon.
Research conducted by RCH indicates that preserving one 401(k) account with $7,000, at age 25, instead of cashing it out, leads to that account growing to $86,912 by the time the individual retires. For that job-changer who may have cashed out multiple times, the research shows $7,000 preserved in a 401(k) account at ages 25, 35 and 45, instead of cashing out, would have grown to $157,878 in retirement savings. When you aggregate the impact of keeping this money working for people’s retirement over a full career, Auto Portability preserves $744 billion in savings for all minorities and $216 billion for African Americans. That’s a meaningful impact on the retirement sufficiency and wealth of the American workers and particularly African American workers.
WJ: What is Portability Services Network and how does it change the defined contribution paradigm?
BJ: The Portability Services Network (PSN), of which I am also chairman, went live with the Auto Portability solution in October 2023. PSN creates a digital, nationwide clearinghouse for 401(k) plans across the country, making Auto Portability available to far more individuals, as it represents over 63% of the 401(k) industry. PSN continues and expands the opportunity for standardized and automated movement of a participant’s retirement account from a previous employer’s retirement plan into their active account in a new employer’s plan.
The 401(k) recordkeeping companies that are part of the Portability Services Network represent about 82 million Americans across more than 185,000 employer-sponsored retirement plans. All of these workers can now seamlessly transport their 401(k)-account savings to their active accounts in their current employers’ plans after they switch jobs.
This solution makes it possible for tens of millions of underserved and under-saved Americans to keep their retirement savings invested in the retirement system, and working for them, when they change jobs—across their working lives. It functions as an industry utility, and it has brought together the nation’s largest 401(k) plan recordkeepers—Alight Solutions, Empower, Fidelity Investments, Principal, TIAA and Vanguard—to offer this solution. Auto Portability and PSN will have major positive impacts on the retirement savings industry and the retirement outcomes of American workers.
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WJ: Is there anything more on the horizon that might change African Americans’ retirement savings and wealth outcomes?
BJ: Yes, there is a program called the Saver’s Match, which was passed into law at the end of 2023 and will become effective in 2027. The Saver’s Match will be a federally funded, income-adjusted matching contribution into a taxpayer’s qualified account, up to $1,000. Unlike the existing Saver’s Credit, which is a credit against taxes the individual owes, the Saver’s Match will actually deposit a contribution into the individual’s 401(k) account or IRA. This program is intended to not only augment the retirement savings of low- and middle-income Americans, but also to nudge those low- and middle-income individuals who aren’t saving into starting, so they can receive this annual contribution from the government.
We, at RCH believe the populations that will benefit most from the Saver’s Match will overlap considerably with the same groups benefitting the most from Auto Portability—minorities, women and low-wage earners. Further, it has been estimated that minorities make up only 25% of those contributing to 401(k) and other retirement savings plans. The Saver’s Match may be the incentive needed to encourage minorities to proactively take advantage of their employer’s 401(k) plan to start saving to improve their financial outlook in retirement.
While there are a few years before the Saver’s Match program starts, I encourage the 401(k) industry’s recordkeepers and employers to embrace the Saver’s Match, as its social benefits will likely be a game changer for many under-saved and underserved Americans. But mostly, I encourage individuals who haven’t saved much or at all for their retirement to take advantage of this program. It’s more free money!
WJ: Bob, any closing comments?
BJ: RCH has worked tirelessly with partners in both the public and private sectors, including both Democrats and Republicans in Congress, to bring Auto Portability, and the national 401(k) clearinghouse (PSN) driving it, towards universal adoption. I am very proud of the contributions we at RCH and PSN have made to improve the retirement outcomes of Black Americans, and in fact, all Americans. Auto Portability, which makes it simple for workers to transport and consolidate their 401(k) savings and keep those savings working for them, is truly groundbreaking.
We are leading the way in tangibly closing the retirement savings shortfall in our country, which is especially harmful to members of our minority communities and other vulnerable groups. And we look forward to seeing the results of our innovation and hard work in real time, as more and more hardworking Americans increase their retirement savings by resisting the urge to cash out or leave behind their 401(k) savings during their working lives.
