SECURE 2.0 enshrines auto portability into law

In a move that experts say will reduce plan leakage, a new law codifies the auto portability process so that a worker's 401(k) plan can be automatically rolled over to a new employer when changing jobs.

The provision is one of more than 90 included in a bipartisan retirement security package known as SECURE 2.0 that lawmakers passed in December as part of a year-end spending bill.

Currently, plan sponsors are permitted by law to kick out small accounts with balances under $5,000 when workers leave by offering them an option to either cash out their balances or transfer the funds to an individual retirement account or the worker's new employer's plan. Participants who cash out their balances are taxed on their distributions and are hit with a 10% early withdrawal penalty if under the age of 59½. Those that transfer their funds to an IRA often wind up paying much higher fees than they were in their 401(k) plan. And if a participant doesn't make a choice, the plan sponsor can roll that money into an IRA for the participant or send the participant a check. The funds directed into IRAs are then typically invested in either a money market fund or certificate of deposit, which do not offer high returns.

In 2017, Retirement Clearinghouse LLC launched a service that helps automatically move participants' savings back into retirement plans at their new employers. In 2018 and 2019, the Department of Labor released guidance that allowed RCH to significantly expand the use of auto portability by allowing negative consent roll in contributions of small balances. The second piece of Labor Department guidance, a prohibited transaction exemption finalized in July 2019, came with a five-year renewal requirement.

But the auto portability provision in SECURE 2.0 codified into law the use of negative consent roll in transactions, so no renewal of the exemption is required, noted Neal Ringquist, executive vice president and chief revenue officer at RCH, in an email. "This removed some potential uncertainty some of those record keepers and plans had regarding the permanence of auto portability," he added.

The SECURE 2.0 provision also extended the minimum auto portability threshold to $7,000 from $5,000, a move that will allow more participants to benefit, said Sterling Ingui, head of next generation products, workplace investing at Fidelity Investments.

The provision will "help boost the overall employee's financial wellness and their well-being," Ms. Ingui said. "It will help address the long-standing problem of plan leakage in the industry. So we're thrilled to see Congress come together and help us."

Fidelity, Vanguard Group and Alight Solutions, in coordination with RCH, announced in October the formation of the Portability Services Network. The consortium, which will launch in the first quarter of 2023, is designed to reduce plan leakage in the retirement system and can include up to three additional major record keepers as owners, though is open to all record keepers to connect.

An estimated $92 billion in savings left the U.S. retirement system in 2015 because Americans who switched jobs prematurely cashed out their workplace retirement accounts and paid taxes and penalties on those cash-outs, according to Employee Benefit Research Institute data cited in the consortium's October announcement.

The SECURE 2.0 provision stipulates that an automatic-portability provider must acknowledge in writing that it is a fiduciary on auto-portability transactions; its fees "shall not exceed reasonable compensation and must be approved in writing by the plan fiduciary;" and it "shall not market or sell data relating to the individual retirement plan."

Moreover, employees must be given at least 60 days notice of an automatic-portability transaction and have the ability to opt out.

The provision directs the Labor Department to issue guidance within one year of the bill's effective date on items that include an automatic-portability provider's notice and disclosure requirements.

Tim Rouse, executive director at SPARK Institute, which represents retirement industry players such as record keepers, investment advisers, mutual fund companies and benefit consultants, welcomed the provision on auto portability. "We think it is important for Congress to provide plan sponsors and providers with a variety of tools to make sure participants do not lose track of their accounts, and we expect the marketplace to continue to innovate to figure out cost-effective and workable solutions," he said in an email.