Neal Ringquist is executive VP and chief revenue officer of Retirement Clearinghouse LLC, a portability solutions provider collaborating with the private and public sectors to help Americans save more for retirement across their working lives.
Russ Alan Prince: Which SECURE 2.0 provisions do you feel will impact retirement savings most, and what advice should advisors give their clients regarding these provisions?
Neal Ringquist: There are two provisions in the SECURE 2.0 Act of 2022 that can make a big impact on the income Americans can enjoy in retirement. One is the provision enabling employer-sponsored retirement plans and recordkeepers to offer the auto portability solution for participants who switch jobs. The second is the increase in the limit on 401(k) account balances that can be automatically cashed out by sponsors and recordkeepers and transferred to default IRAs, from $5,000 to $7,000.
The auto portability solution, developed by Retirement Clearinghouse, allows plan sponsors and their recordkeepers to automatically transport a participant’s small-balance savings of up to $7,000 from their former employer’s plan into an active account in the participant’s current employer’s plan.
Auto portability can take place after an employee switches jobs or at the very point of job change. Do-it-yourself account portability and consolidation across their working lives is time-consuming and expensive for participants, and without help, too many participants are tempted to leave behind their 401(k) accounts in their former employers’ plans. Or, worse, they view prematurely cashing out their 401(k) savings and paying taxes and penalties on what they cash out as another easy option when they change jobs.
Cashing out is a very destructive decision for retirement savers. To give you an idea of just how detrimental cash-outs are to Americans saving for retirement, the Employee Benefit Research Institute—EBRI—estimates that $92 billion is lost from the U.S. retirement system on an annual basis, and the vast majority of that loss is from premature cash-outs.
But besides helping plan participants avoid the temptation to cash out, auto portability can also prevent job-changing participants’ savings from being automatically moved into default IRAs, or “safe-harbor IRAs,” without their consent. The Economic Growth Tax Relief Reconciliation Act—EGTRRA—of 2001 gave employer-sponsored plans the power to automatically roll 401(k)s with small balances up to $5,000 into safe-harbor IRAs without the consent of the account holder. Now, that small-balance limit has been changed to $7,000 as of December 31, 2023.
Hard-earned 401(k) savings can be depleted over time in safe-harbor IRAs due to high fees and low returns. Most of the approximately 8.1 million safe-harbor IRAs are still invested in the money market mutual funds the assets were defaulted to.
Auto portability enables participants to avoid this fate for their savings and instead consolidate their savings into active accounts in their current employers’ plans at the point when they change jobs. Avoiding cash-out leakage through consolidation allows retirement balances to grow and accounts to be incubated, resulting in improved retirement outcomes for participants. Financial advisors can play a big role in introducing auto portability to clients, a service that not only improves participant retirement outcomes but improves key plan metrics, such as average account balance, without additional costs to the plan sponsor.
Prince: How is the auto portability provision in the legislation different from the guidance Retirement Clearinghouse received from the DOL on auto portability?
Ringquist: The guidance our auto portability solution received from the Department of Labor in 2018/2019 was extremely useful in helping plan sponsors, and recordkeepers overcome obstacles to adoption, but SECURE 2.0 has actually codified auto portability into law. The DOL guidance required renewal of the exemptions necessary for adopting auto portability every five years. The SECURE 2.0 provisions do away with that renewal period while also incorporating most of the guardrails and consumer protections that were in the DOL guidance.
Prince: What is the potential impact of the increase in the mandatory distribution limit on auto portability?
Ringquist: More 401(k) accounts stranded by terminated participants in employer-sponsored plans would be in danger of being automatically cashed out and transferred into a safe-harbor IRA.
According to Retirement Clearinghouse’s Auto Portability Simulation model—incorporating data from EBRI, the DOL, and large plan recordkeepers—1.1 million participant accounts across the 401(k) plan system could immediately become eligible to be forced into safe-harbor IRAs in 2024, as a result of the mandatory distribution threshold climbing to $7,000. This is why it is so important for plans to couple an auto portability implementation with the increase in the mandatory distribution limit, as more participants will be caught up in the potentially destructive safe-harbor IRA trap.
Prince: Among 401(k) plan participants, which demographics will benefit the most from auto portability?
Ringquist: Minorities, women, young people and low-earning participants can all benefit from auto portability because industry research has shown that these groups are more likely than their peers to cash out their 401(k) accounts within a year of changing jobs.
EBRI found that 14.8 million plan participants switch employers every year. And data from the largest plan recordkeepers indicates that nearly one-third—31%—of these participants will prematurely cash out their 401(k) balances from their previous employers’ plans within a year of the move. However, cash-out rates are higher than average for participants who are ethnic minorities—63% for Black Americans and 57% for Latinos—who earn $20,000 to $30,000 in annual income—50%—or 20 to 29 years old—44%. The cash-out rate within a year of job change is also higher than average for women overall—41%—but especially for women who are between ages 25 and 34–71%.
If auto portability were to be adopted by sponsors nationwide over a 40-year period, EBRI estimates that an additional $1.5 trillion, measured in today’s dollars, would be preserved in the U.S. retirement system. This $1.5 trillion in extra retirement savings would include $191 billion for 21 million Black Americans, and $619 billion for all 401(k) plan participants who are members of minority communities.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.