Robert L. Johnson, Founder and Chairman of The RLJ Companies and Chairman of Retirement Clearinghouse, LLC, applauds Senator Tim Scott (R-S.C.) and Senator Sherrod Brown (D-Ohio) for the introduction of the Advancing Auto Portability Act of 2022. The U.S. Senate legislation has the potential to preserve up to $1.5 trillion in retirement savings for the next generation of workers by encouraging auto portability. With auto portability, a participant’s 401(k) account can follow them as they change jobs, making it less likely that people prematurely cash out their savings and improve retirement security.
“I congratulate Senators Tim Scott and Sherrod Brown for leading this bipartisan push to build wealth for underrepresented American communities. Auto portability will help historically underserved and under-saved workers, especially Black Americans, realize greater benefits from the U.S. retirement system—and achieve the American dream of a financially secure retirement,” said Mr. Johnson. “Enshrining auto portability in law is a significant milestone in our national effort to bridge America’s wealth gap.”
“This legislation recognizes that cash-out leakage—driven by the frictions prevalent in moving money between plans in our country’s retirement system—is adversely affecting Americans’ retirement outcomes in a very big way,” said Spencer Williams, Founder, President, and CEO of Retirement Clearinghouse. “401(k) savings portability will institute a new default in plan designs, which will enable participants to opt out of having their small balances automatically moved to their new employers’ plans when they change jobs, instead of having to opt in. Senators Scott and Brown have crafted legislation that would make this default available to all plans across the U.S. retirement system—a huge win for America’s hardworking retirement-savers. The Pension Protection Act of 2006 greenlighted auto enrollment and the use of target-date funds as default investment vehicles—and now, we are closer than ever to a default setting for auto portability of small accounts, at the point of job-change. Finally, the leveling-up of retirement-saving outcomes is within reach.”
Getting to the Root of the Problem
The lack of seamless plan-to-plan account portability when participants switch employers has historically made cashing out an easier option than moving and consolidating 401(k) account balances. Prematurely cashing out a retirement savings account can have destructive consequences for retirement-savers.
The Employee Benefit Research Institute (EBRI) estimates that as much as $92 billion in savings leaves the U.S. retirement system every year, as workers prematurely cash out their 401(k)s when they change jobs, and pay taxes and penalties on those cash-outs. Retirement Clearinghouse research indicates that a hypothetical 30-year-old participant who cashes out a 401(k) account with $5,000 today would forfeit up to $52,000 in earnings they would have accrued by age 65, assuming the account would have grown by 7% per year.
Unfortunately, minorities and low-income workers are more likely to make this cash-out decision. According to EBRI, 14.8 million plan participants change jobs every year—and data from the largest retirement plan recordkeepers indicates that nearly one-third (31%) of them will cash out their 401(k) savings accounts within one year of moving to new employers. However, these rates are higher among plan participants who belong to minority communities (63% for Black Americans and 57% for Latinos), are between ages 20 and 29 (44%), or earn $20,000 to $30,000 in annual income (50%). Similarly, the percentage is higher for women (41%), especially women between ages 25 and 34 (71%).
“Women often wind up having to work longer than they expected due to unforeseen circumstances and expenses, especially if they outlive their spouses,” said Cindy Hounsell, President of the Women’s Institute for a Secure Retirement (WISER). “This new legislation will make it easier for women to overcome the inequities that have, historically, placed them at a disadvantage when saving for retirement.”
Why Auto Portability is the Solution
To address this growing problem, members of the private and public sectors have worked together to develop and implement auto portability—the routine, standardized, and automated movement of a retirement plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan. Auto portability was conceived and built to meet the needs of plan participants with account balances of less than $5,000, who often lack access to the portability solutions afforded to their counterparts with larger accounts. The auto portability solution is designed to connect recordkeepers operating within the U.S. qualified 401(k) plan system, establishing a network that facilitates data flows. The Department of Labor provided Retirement Clearinghouse with guidance for its auto portability service in 2018 and 2019.
EBRI estimates that the widespread adoption of auto portability would preserve up to $1.5 trillion in additional retirement savings—measured in today’s dollars—in the U.S. retirement system over a 40-year period. That $1.5 trillion would include approximately $191 billion for 21 million Black Americans, and $619 billion for all minority retirement savers.
Over the past few years, several large defined contribution plan recordkeepers have adopted auto portability for the plans they service. The Advancing Auto Portability Act supports the continued expansion of auto portability by creating a $500 tax credit to help businesses—and in particular, small businesses—with implementation costs and making the Department of Labor’s 2019 guidance permanent.
More information is available at rch1.com/plan-sponsors.
Support for Auto Portability
The National Urban League and National Association for the Advancement of Colored People (NAACP) have sent letters to Mr. Johnson in support of auto portability.
Marc H. Morial, President and CEO of the National Urban League, ended his letter of support by stating: “Based on the far-reaching benefits of auto portability, the Urban League is pleased to join this public policy conversation, as our entire economy benefits when Americans can afford a secure and timely retirement. By strengthening the defined contribution leg of America’s ‘three-legged stool,’ the Urban League believes all sectors of our economy benefit, including the private sector, the taxpaying public, and all levels of government. Now is the time for all of us to work together to reduce the wealth gap and make retirement more secure for Black families. The National Urban League stands behind all efforts to empower Black Americans and we are pleased to be aligned with you on the issue of Auto Portability.”
Derrick Johnson, President and Chief Executive Officer of the NAACP, wrote in his letter of support, “The implementation of Auto Portability is a necessary and transformational tool in addressing the racial wealth gap. It will ensure that Black families, and other communities of color, have the financial infrastructure necessary to maintain economic stability for retirement.” He also wrote, “Although Auto Portability alone will not address the racial wealth gap, it has the ability to positively support the ability of Black workers to build lucrative retirement investments by creating a streamlined approach to savings; one that reduces the opportunities of workers to withdraw investments. As an organization committed to identifying solutions to economic challenges and inequities experienced by Black people, and other communities of color, the NAACP is committed to being a partner in advancing the implementation of Auto Portability as an essential tool to address racialized economic inequities.”
To learn more about auto portability, please visit rch1.com/auto-portability.