Clearly, Washington DC is now “getting it” when it comes to retirement plan portability.
In November 2015, Senator Patty Murray and other influential members of Congress delivered a letter to Department of Labor Secretary Perez urging action on Auto Portability. Now, we have strong comments from President Obama in his final State Of The Union address on the need for more portable retirement savings.
It seems that Washington now clearly understands the frictions associated with retirement savings under the current retirement system. They further realize that Auto Portability – a private sector solution – can plug leakage (cash outs and unnecessary fees), allowing retirement savings to move forward along with a mobile workforce, while promoting lifetime participation in retirement plans.
The Building Momentum for Retirement Plan Portability
The momentum towards portability has been steadily building. In 2009, the U.S. Government Accountability Office (GAO) published 401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Worker’s Retirement Savings which highlighted, perhaps for the first time, the devastating impact of cash out leakage on the retirement readiness of 401(k) plan participants. Subsequent research reports published by Aon Hewitt, Vanguard and Fidelity were all consistent with the findings in the GAO report.
Most recently, a Retirement Clearinghouse/Boston Research Technologies Mobile Workforce study completed in 2015 examined the distribution decisions of 401(k) plan participants, firmly establishing the linkage between frictions associated with retirement account portability and adverse participant behavior upon job change, such as cash outs and stranded accounts.
The Auto Portability Solution
In his address to the nation, the President spoke of a “new economy” where workers “change jobs more often” while highlighting the need for improved portability, adding that “for Americans short of retirement, basic benefits should be as mobile as everything else is today.”
For separated participants with less than $5,000, Auto Portability can deliver a solution that meets this Presidential goal.
Auto Portability is the routine, standardized and automatic movement of a separated participant’s small balance retirement account (less than $5,000) from the former employer’s plan to an active account at a new employer’s plan, when the participant changes jobs. The technology and processes exist for such a transaction - Retirement Clearinghouse (RCH) has published FAQs that explain the RCH Auto Portability service.
What’s Needed – DOL Guidance on the Use of Negative Consent
Presently, regulations allow the former employer to automatically move these small balance accounts out of the plan and into a safe harbor IRA (also known as an automatic rollover or a mandatory distribution). However, there is no guidance on the automatic roll-in of these balances to an active plan.
What is now required is an Advisory Opinion from the Department of Labor on the ability to use negative consent to automatically roll balances into the participant’s active plan. That is the request from Senator Murray and the bicameral group of Congressional members in their November letter.
With Labor’s guidance in place, recordkeepers and plan sponsors will have the clarity needed to enable Auto Portability, and to establish the mobile retirement benefits the President called for in his State of the Union address.