RCH Consolidation Corner

The 401(k) “House-Cleaning” to Come

Written by Thomas Hawkins | June 16, 2023

The increase in the automatic rollover threshold from $5,000 to $7,000, as provided for in section 304 of the SECURE 2.0 legislation, will become effective for mandatory distributions made after December 31, 2023.

What will be the impact of these provisions, if fully embraced by plan sponsors? One thing is certain – on both a one-time and ongoing basis, far more terminated participants will be subject to the automatic rollover provisions of their former-employers’ plans.

And while the “house-cleaning” of small-balance 401(k) accountholders that this measure precipitates will benefit plan sponsors, affected participants may finally win, too -- avoiding the past pitfalls of ‘traditional’ automatic rollovers, thanks to the advent of auto portability and to the operational status of the Portability Services Network, an industry-led utility dedicated to auto portability’s adoption.

Traditional Automatic Rollovers
Since 2005, traditional automatic rollovers have served as 401(k) plans’ “house-cleaning” mechanism, allowing plan sponsors to purge their ranks of small-balance, terminated participant accounts below the legally-mandated threshold, which has been set at $5,000 since 2005.

Clearly, plan sponsors have “won” by forcing out small-balance participants, which lowers plan costs and reduces fiduciary risk. Unfortunately, for participants, there’s been little to cheer about. For those who avoided cashing out, they received one-way tickets to dead-end safe harbor IRAs, where their savings earned money market returns, endured a blizzard of fees, and faced barriers to exit. Today, it’s estimated that about 8.1 million of these sub-optimal safe harbor IRAs still persist – and still invested in money market mutual funds.

The House-Cleaning Yet to Come
It stands to reason that bumping the automatic rollover threshold from $5,000 to $7,000 will increase the ranks of affected participants, and that’s precisely what the estimates reveal.


Based on Retirement Clearinghouse’s Auto Portability Simulation (APS) model – which incorporates data from EBRI, the Department of Labor and large recordkeepers – this year, around 5.9 million defined contribution plan participants will change jobs with a balance less than $5,000. In 2024, when the threshold increases from $5,000 to $7,000, the APS model predicts that figure will climb to 6.7 million participants per annum, an increase of almost 800,000 job-changing participants per year.

Over time, there’s also been a long, slow build-up of terminated plan participants with $5,000 - $7,000 accounts that have not previously been subject to force out provisions. On a one-time basis beginning in 2024, the APS model projects that 1.1 million participant accounts could immediately become eligible to be retroactively forced out into safe harbor IRAs.

The Good News: Auto Portability and PSN Change the Game
Thanks to auto portability, traditional automatic rollover IRAs will begin to become a thing of the past, and 2024 will herald the beginning of the widespread adoption of auto portability, delivered via the Portability Services Network (PSN), an industry-led utility comprised – as of this writing – of 6 owner members, including 5 large recordkeepers representing almost 71 million participants (or 55% of total market) in over 143,000 defined contribution plans, with more on the way.

Under auto portability, participants win, bigly. They’ll not only cash out at levels less than half of the rates typically observed, but by default, they’ll see their small-balance savings automatically transferred to their current-employer’s plan. Perhaps that’s why, in the 2021 EBRI Retirement Confidence Survey, almost 9 in 10 employees indicated their preference for auto portability.

Finally, plan sponsors who embrace auto portability will still win – they’ll just win bigger. Not only will they clean house of their terminated, small-balance accounts, but they’ll also receive automatically rolled-in balances for new participants.

Good-Bye Traditional Automatic Rollovers, Hello Auto Portability
In the soon-to-be bygone era of traditional automatic rollovers, increasing the balance threshold to $7,000 would have benefitted plan sponsors, but penalized their small balance terminated participants. This time will be different. In 2024, participants whose plans embrace auto portability can finally win as well.