To help prevent retirement plan cashout leakage when workers change jobs, Sen. Tim Scott (R-SC) and 10 other GOP Senators plan to send a letter today to Labor Secretary Alexander Acosta asking the DOL to issue guidance clarifying the application of ERISA to auto portability features — that is, ones that help facilitate the movement of a participant’s retirement account from one employer to another.
“With an estimated 14 million workers with 401(k) plans changing jobs each year, reducing leakage and consolidating low-dollar accounts through greater use of auto portability will set millions of working Americans on a better path to a secure retirement,” the letter notes.
The American Retirement Association, along with the American Benefits Council, Financial Services Roundtable, Investment Company Institute, Insured Retirement Institute, Securities Industry and Financial Markets Association and U.S. Chamber of Commerce, support the letter.
Other senators signing the letter include: Bill Cassidy (R-LA), Susan Collins (R-ME), Tom Cotton (R-AR), Mike Crapo (R-ID), Steve Daines (R-MT), David Perdue (R-GA), Pat Roberts (R-KS), Mike Rounds (R-SD), Thom Tillis (R-NC) and Todd Young (R-IN).
The senators specifically request that DOL issue an Advisory Opinion (AO) or other appropriate guidance as soon as possible providing legal clarity to help expedite such transactions.
Noting that a corresponding AO request was first received by the department in April 2013, the senators write, “We are concerned that the continued delay of the Department’s AO is a hurdle to the implementation of a workable, market-based solution that will help our constituents prepare for their retirement.” They add that, “Without the DOL’s guidance, plan sponsors and others lack clarity around what can be done under the law to facilitate auto portability.”
The request for the AO specifically applies to the use of “negative consent” on accounts with less than $5,000. In general, many plans require participants with less than $5,000 to take the money with them when they leave the company. When presented with this option, many participants choose to take the cash or give up on trying to roll their balance into their new employer’s 401(k) because the process is evidently too cumbersome.
The letter cites research from EBRI contending that system-wide adoption of auto portability for all retirement balances could increase private-sector savings by nearly $2 trillion (in current dollars), adding that stopping leakage from smaller accounts alone would save $1.5 trillion.
Retirement Clearinghouse President/CEO Spencer Williams, who often writes and speaks about auto portability issues, has previously stated that approximately 37% of job-changers cash out of their retirement accounts because they needed the money, while the remaining 63% did so because it was “the easiest path available,” despite the early withdrawal penalty and taxes.
Williams suggests establishing a mechanism of electronic records matching for individuals between a former employer’s retirement plan and the new employer plan so that their retirement savings can be transferred automatically.