Recordkeeper Alight Solutions will spearhead the launch of the latest “auto” to be added to the list.
Following auto-enrollment, deferral and escalation, the Illinois-based Alight will deploy the Retirement Clearinghouse Auto Portability program, which it says makes it easier for U.S. workers to move 401k assets from one employer plan to another, thereby reducing premature cash-outs.
Job-changing workers cash out their 401k plans and pay taxes and penalties in the amount of $92 billion every year, according to the Employee Benefit Research Institute (EBRI).
Black and Hispanic workers are the most adversely affected by this phenomenon—63% of black and 57% of Hispanic workers cash out upon changing jobs. Low-income and younger workers also have high cash-out rates, as 50% of workers earning $20,000 to $30,000 and 44% of workers between ages 20 and 29 cash out within a year of switching jobs.
Auto portability is the routine, standardized, and automated movement of a worker’s 401k savings account from their former employer’s plan to an active account in their current employer’s plan.
The U.S. Department of Labor (DOL) issued regulatory guidance in July 2019 and November 2018 which cleared the way for plan sponsors and recordkeepers to adopt the technology enabling auto portability.
The RCH Auto Portability service, which automates the consolidation process for small accounts, has been in operation on a pilot basis since 2017.
RCH completed the first-ever fully automated, end-to-end transfer of retirement savings from a safe-harbor IRA into a worker’s active account in July 2017. Since that time, more than 1,600 workers have consented to have their former-employer plan accounts transferred into their current employer’s plan.
“Our vision is to dramatically reduce both premature cash-outs and savings depletion from fees charged to stranded, small-balance IRAs by providing an automated method for consolidating workers’ retirement accounts as they change jobs,” Spencer Williams, Founder, President, and CEO of Retirement Clearinghouse, said in a statement. “These goals will be accomplished through the construction of a nationwide, electronic network that connects all employer-sponsored plans. We are pleased that Alight shares that vision, and has stepped up to the plate to turn it into a reality for its clients. From this point forward, each recordkeeper that implements the technology powering auto portability will expand the network until it reaches its full potential.”
EBRI research estimates that if all U.S. retirement savers had access to auto portability, nearly $1.5 trillion in additional retirement savings would be retained in their 401k savings accounts over a 40-year period. Widespread adoption of auto portability would also preserve approximately $191 billion in savings for 21 million black Americans and $619 billion for all minority workers.
EBRI research
EBRI predicts auto portability can add significant value to the provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in 2019.
EBRI’s findings indicate the SECURE Act will reduce the U.S. retirement savings shortfall by 3%, or $115 billion.
However, when combined with auto portability, the country’s retirement savings shortfall would decline by 10%, or $383 billion—a further $268 billion over the SECURE Act provisions alone.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
