What happened to auto-portability?
Aspen Institute survey of retirement experts found that 57% supported a mandate for auto-portability.
Americans who change their jobs throughout their careers are likely to leave behind a trail of retirement benefits that can’t or don’t fit well together, according to the Aspen Institute’s Financial Security Program.
The solution is portability, the institute said. However, more than 40 years after a presidential commission recommended making retirement programs more portable, policymakers are still struggling with the issue.
In its report, the Aspen Institute noted that when it comes to job changes, research has shown that Americans have a median of 12 jobs during their career. Some 16% of job changers move to a company that has no retirement plan. Between $60 billion and $105 billion in savings is lost to plan cash-outs each year. And some 85% of retirement savers would find automatic transfers between programs valuable.
The institute said that when retirement plans are tied to specific jobs, it is up to workers to keep track of their benefits.
Aspen pointed out that each transfer raises the risk of leakage, as workers see a chance to cash out rather than maintaining their retirement account, “True retirement security, then, must be built on three pillars: not only access to a savings plan and sufficient income to fund it, but also systems that support retention,” Aspen said.
The current process of moving workplace retirement accounts from one employer to another remains onerous, “littered with unnecessary points of friction.”
In its report, based on its forum on retirement savings held in April, and subsequent conversations, Aspen said that modified IRAs might be the best portability option.
“When it comes to portability, IRAs are a practical and flexible choice, easily accommodating job changers,” Aspen said. “But to maximize their usefulness would mean raising contribution caps. An even more significant enhancement would be to allow employers to match worker contributions to an IRA.”
Any program that would make transfers between retirement plans easier would have to provide for standardization of data and rules
Aspen said that there was not agreement among forum participants over whether the federal government should require employers to transfer the retirement accounts of workers who change jobs.
An Aspen survey of retirement experts found that 57% supported a mandate and nearly half said that automatic portability would only be possible if the federal government mandated it.
Aspen said one solution is to have a single retirement plan to which multiple employers can direct payments, even at the same time, across an employee’s career.
Current state auto-IRAs are interoperable as long as a worker’s next job is in-state and with a participating employer. Aspen said that in Washington state, the Secure Retirement Plan for home care workers also are interoperable.
Aspen said that a more provocative proposal is totally decoupling retirement plans from employers.
“In the end, when it comes to portability and streamlining a saver’s number of plans, participants noted that the most crucial distinction might be between pre- and post-tax funds,” Aspen said. “Absent allowing those funds to exist side by side in a single plan, we could set a goal of two consolidated retirement accounts for all savings accumulated over a career. From a behavioral-finance standpoint, that’s a situation that savers can manage.”
The issue is not new, according to the Government Accountability Office, which reported that the 1979 President’s Commission on Pension Policy recommended the creation of a universal pension system that would provide a portable benefit for all workers and exist as a supplement to Social Security.
But as GAO reported, “many of the commission’s recommendations were not implemented.”
More recently, lawmakers on Capitol Hill have introduced legislation to create portable retirement plans.
In February, Sen. Mark Warner, D-VA introduced legislation that would require the Labor Department to create a pilot program to test portability.
Last year, Warner and Rep. Jim Himes, D-Conn., introduced legislation that would create universal, portable retirement and investment accounts. Every American would receive an account at the same time they receive a Social Security number. Employers would be permitted to deposit funds into workers’ accounts.
“The current retirement system isn’t working for all Americans,” Himes said. “The options to which American workers have access can differ significantly based on their area of employment and the systems can be needlessly confusing. In addition, many Americans lose access to retirement savings vehicles if they lose their jobs, and gig, contract, and part-time workers are often ineligible.”
The bills have been assigned to House and Senate committees in their respective houses but have not progressed any further.
READ MORE: