Five Reasons Why New 401(k) Auto Portability Legislation is So Important

A newly proposed bill -- the Advancing Auto Portability Act of 2022, co-sponsored by Senators Tim Scott (R-S.C.) and Sherrod Brown (D-Ohio), will offer tax credits to plan sponsors who implement auto portability, and codify rules for an industrywide auto portability network. The bill is expected to be rolled into the Senate version of the bipartisan Securing a Strong Retirement Act of 2022, which passed the U.S. House of Representatives on March 29 of this year.

Here are five reasons why the new auto portability legislation introduced in the Senate is so important.

• Increasing retirement security by dramatically reducing cashout leakage and preserving retirement savings for small-balance (under $5,000) job-changing participants. Within the confines of our present defined contribution system, EBRI estimates that auto portability would deliver $1.5 trillion in incremental savings, valued in today’s dollars.
• Delivering disproportionate benefits to workers most affected by small balance cashouts, including minorities, women, younger age groups and those with lower incomes.
• Dramatically improving the quantifiable benefits of any retirement savings policy initiative that would expand access to, or increase participation in, workplace retirement savings plans. EBRI research is replete with examples of public policies whose benefits are super-charged simply by the incremental addition of auto portability.

The proposed legislative framework for auto portability owes a tremendous debt to the regulatory framework already developed and promulgated by the U.S. Department of Labor.

However, the proposed legislative framework will be more durable, reliable, and open than the existing regulatory regime. For example, the proposed legislation will eliminate the requirement for renewal every five years, thereby encouraging greater plan sponsor adoption. Also, the auto portability framework is more “open” as it is not hard-wired to any particular auto portability provider, as the DOL’s initial Advisory Opinion and Prohibited Transaction Exemption currently are.

Finally, there is a modest but important tax credit for plan sponsors adopting auto portability.

3. It Extends Auto Portability’s Broad, Bipartisan Support
The proposed legislation follows on the heels of endorsements from the Urban League and the NAACP and extends the coalition in support of auto portability, which already includes large defined contribution recordkeepers, large employers, legislators, regulators, and trade organizations.

Politically, the proposed legislation represents the culmination of years of bipartisan support for auto portability in the U.S. Congress, dating back to 2015, when a bicameral group of Congressional members led by Senator Patty Murray (D-Wash.) sent a letter to the Employee Benefits Security Administration urging the agency to issue guidance for plan sponsors on auto portability.

4. It Increases Confidence in Auto Portability
While support has been broad, auto portability has had its share of doubters. This is a perfectly natural reaction to innovations, and this legislation goes a long way towards building even greater confidence in auto portability and the outsized benefits of this new plan feature. The increase in confidence in auto portability will spur its adoption.

Those expressing doubts typically voice concerns that auto portability “can’t work” until everyone has adopted it. While I understand the sentiment, auto portability works with just a couple of recordkeepers and certainly becomes more impactful as additional institutions are onboarded. But also, auto portability can successfully integrate with all forms of consent-based portability, even if a plan sponsor on one end or the other has not yet adopted the feature, to deliver meaningfully successful account portability results.

5. It Gives 401(k) Participants What They Want
In EBRI’s 2021 and 2022 Retirement Confidence Survey (RCS), participants expressed an overwhelming and very specific interest in auto portability and in increasing plan-to-plan portability, in general.

• In the 2021 RCS, 85.3%, or nearly 9 in 10 respondents, indicated that automatic transfer (i.e., auto portability) would be valuable to them. A deeper dive into the 2021 RCS results revealed that those who stand to benefit most from auto portability, want it even more – including minorities, younger age groups and lower-income workers.
• The 2022 RCS found that a majority of job-changing 401(k) plan participants favored automatic plan-to-plan portability over consolidating their savings to an IRA, or to leaving their savings behind in their former employer’s plan.

A Legacy in the Making
I firmly believe that the newly proposed legislation from Senators Scott and Brown is a vitally important step on the path to market adoption of auto portability, and once enacted, will ultimately become one of the most important and successful retirement savings public policies to emanate from Washington, DC.