The Path of Less Resistance

There was some good news — and some disappointing news — about the take-up of a “new” plan design last week.

It was the first anniversary of a coalition of recordkeepers called the Portable Services Network (PSN) — a consortium of firms that includes Alight, Vanguard, Fidelity Investments, Empower, TIAA and Principal — not to mention the Retirement Clearinghouse, whose long-term patience and commitment made the concept of auto-portability a reality. There’s even support for auto-portability in SECURE 2.0.     

The Good News

The good news: PSN reported that in its first year of operation — more than 15,000 plans representing approximately 5 million participants have signed up for auto portability. According to a press release, 549 auto portability transactions have been completed as of Dec. 1, 2024; and 7,841 auto portability transactions are “in motion” as of Dec. 1, 2024. In-motion transactions are those where the Retirement Clearinghouse has confirmed a match for an account holder of a small account stranded in a retirement plan or moved into a safe-harbor IRA (with the opt-out/consent notification process having been initiated). 

Why This Matters

Auto-portability is a process that facilitates an automatic rollover from one plan to another (or an IRA) when an individual changes jobs or otherwise terminates employment. Like auto-enrollment, it seeks to take advantage of behavioral finance — taking a complex process and creating a default that works to the benefit of the participant. As with automatic enrollment, participants can opt out — but in creating an “easy” path to do the “right” thing, it is hoped that not only will these balances remain as retirement savings, but that it will be easier for individuals to keep up with and manage their retirement savings.        

It’s a big deal — the Employee Benefit Research Institute has said that the leakage associated with job change could add up to $1.6 trillion in additional retirement savings over a 40-year period. More significantly, it could add up to $744 billion in extra retirement income for 98 million minority job-changers, with 30 million Black Americans expected to preserve $216 billion in incremental retirement wealth.

While there has been improvement over the years, those rollover decisions are — complicated. In fact, as I put together the financial components of my “retirement,” there was one aspect I dreaded more than any other. My balances were large enough that I didn’t HAVE to do anything more than leave my account “behind” — and for me that was certainly easier and less painful than going through the rollover process. 

That said, many don’t have that option — they are only presented with the option to roll it over to the IRA (that they probably don’t have) or a successor 401(k) (that they probably aren’t signed up for yet) — or to take it in cash. And I have to imagine that for the vast majority, taking it in cash is really the only option — even though they’ll wind up paying taxes and penalties that will significantly erode their balance — not to mention their retirement security.

The Disappointing News

PSN cited data by the Plan Sponsor Council of America (PSCA), based on the PSCA's survey of plans conducted in Sept. 2024, that found that — (only) 6% of all plans have implemented auto portability or will do so soon, including 12.5% of plans with between 200 and 999 participants, and 8.7% of plans with 1,000 to 4,999 participants.

And while that take-up rate was modest, that same survey found that 25.6% of plans are considering the implementation of auto portability, including 30.4% of plans with 1,000 to 4,999 participants and 47.5% of plans with over 5,000 participants. Not bad, considering that three years ago nearly 80% of plan sponsors surveyed hadn’t even heard of auto-portability!

All that said, for auto-portability to really work — to truly facilitate the movement of retirement savings from one plan to another — you need the broad network. More than that, you need the broad participation of the plan sponsor community to provide that option to retirement savers. Here’s hoping that in the months ahead more do. 

Because, thanks to the PSN it now seems that when it comes to retirement savings, you really, finally CAN take it with you!

- Nevin E. Adams, JD

Path(s) of Least Resistance

So, how many 401(k) accounts do you have?

At the moment, I have four—one from each of the employers in my career (including this one), all except the first one (that one went for law school and a house downpayment). Apparently I’m not alone. A recent survey of Plan Sponsor Council of America members found that only 18% of respondents had a single 401(k) account. Nearly as many (14.3%) had five. As it turns out, three was the most common response.

I joke that it’s just “market research”—after all, what better way to assess the quality of various retirement plan offerings than to have your own 401(k) supported by some of the best? Sure, there’s been institutional pricing at one that I’d hate to lose, access to a specific managed account platform that I value, and a really cool online platform at another—and then, in the back of my mind, is a concern that the taxability detail might get “jostled” in the process—in short, plenty of reasons to rationalize my leaving them where they are. But the truth of the matter is that moving your account remains a bit of a pain.

That has a number of implications, not the least of which is people can (and do) lose track of those “left behind” 401(k) accounts. That’s been an issue of some concern by both regulators and legislators alike—with potential remedies (or at least remedial efforts) like a “lost and found” directory. Perhaps just as significantly, the SECURE Act’s directive with regard to reporting projected retirement income numbers on participant statements won’t do anyone much good if it’s based on only one of the three or four account balances you actually have.[i]

There are other dangers[ii] in having multiple accounts—as they create multiple opportunities for hackers to access them. This is a particular concern when there’s been a change in recordkeepers (which is happening a lot these days), when you have a new account set up for you—but you don’t get around to promptly establishing a secure password (along with multi-factor authentication, personalized answers to key security questions, and electronic notifications of any changes to your account). After all, if you don’t lay claim to that account—quickly—it’s all the easier for a hacker to do so.  

Now, I’m guessing that the reality is that most people who leave their 401(k) accounts behind do so simply because it has become the easy no-action-required default (well, as long as your balance is over $5,000—if less than that, and certainly if less than $1,000, your “easy” default is likely a lump sum payment, taxed, and likely subject to premature withdrawal penalties as well. Indeed, the leakage that so many fret over—due to hardship withdrawals or loans—is fairly inconsequential. The exception, of course, is the loans that are outstanding when termination occurs—as well as the “forced” distributions at termination. A recent assessment by Alight notes that 80% of people who had an account of less than $1,000 cashed out at termination, while nearly two-thirds of those with balances between $1,000 and $5,000 did so.

Enter the Advancing Auto Portability Act of 2022, introduced by Sens. Tim Scott (R-SC) and Sherrod Brown (D-OH), provisions of which have been incorporated in the recently introduced Enhancing Americans’ Retirement Now (EARN) Act. The size of the leakage issue the legislation seeks to stem has been wildly exaggerated by some, but the Employee Benefit Research Institute credibly says auto-portability has the potential to preserve up to $1.5 trillion in retirement savings over a 40-year period. 

That’s right—just like automatic enrollment helps people get started doing the right thing, auto-portability is basically an infrastructure design that automatically helps participants—and most notably participants with small balances—and rolls those balances into an IRA, and then—if available and desirable—rolls that into their new employer’s retirement plan. But more than giving it structure, and legislative “legitimacy” (the Department of Labor lent some help in terms of a prohibited transaction exemption in 2019), the legislation provides a $500 tax credit for adopting small business employers to defray the costs of making the connections.     

Now, at the point of my job changes, it wouldn’t have taken much for me to decide to roll those balances into my new employer’s plan—but it took absolutely nothing at all for me to just leave them where they were—the path of least resistance. On the other hand, the default for those who have smaller balances—who are often just getting started doing the right thing by saving—is a default that requires that they “start over”—with a “forced” distribution, and one reduced by state and federal taxes, and likely a 10% penalty to boot. 

It's time we all had a path of least resistance that makes it easy for us to do the “right” thing. And now perhaps we do.

- Nevin E. Adams, JD

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[i] In fairness, there are already concerns that the calculation proposed by the Labor Department in response to the SECURE Act’s directive already has shortcomings. Specifically, it would assume that the participant: (1) is retiring at age 67 (the Social Security full retirement age for many workers) or the participant's actual age, if older than 67); (2) uses an interest rate that is the 10-year constant maturity Treasuries (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates; (3) estimates life expectancy from a gender-neutral mortality table pursuant to IRC Sec. 417(e)(3)(B)—oh, and the biggie—(4) uses the current account value—assuming no further contributions.

[ii] Another “casualty” of multiple 401(k) accounts? When a provider publishes a list of “average” 401(k) balances (and 401(k) critics pounce on those as inadequate)—well, they might not have the whole picture.