No more 401(k) plan ‘leakage’: SECURE 2.0 auto-portability now in effect

The adoption of auto-portability for American workers’ retirement funds could result in an additional $1.5 trillion in retirement savings—money that is currently leaking out of the system when workers change jobs and cash out of their defined contribution (DC) plans.

This year will mark changes to the retirement savings system, in part due to the new SECURE 2.0 law, that will enable more auto-portability of 401(k) retirement accounts, the Portability Services Network (PSN) and Retirement Clearinghouse (RCH) recently said. The two organizations are part of a public-private partnership to oversee the auto-portability system. The partnership has been working on data sharing and fund transfer capabilities, and includes industry groups such as Alight Solutions, Empower, Fidelity Investments, Principal, TIAA, and Vanguard.

In 2022, Fidelity estimated that $92 billion in savings is lost from the U.S. retirement system annually because Americans who change employment cash out of their low-balance retirement funds or receive an automatic payout without rolling those savings into a new DC plan. Fidelity noted that these lower-balance savings plans were predominately owned by minorities, women, lower-income, and younger workers in the U.S.

Robert L. Johnson, Chairman of PSN and RCH said the new system will serve more than 60% of all workers seeking to maintain 401(k) accounts as they move through their working lives.

“Working with the nation’s employers, PSN’s network of plan providers has the potential of helping American workers retain more than $1.5 trillion in retirement savings that is currently leaking out of the system when they change jobs, including $619 billion in retirement savings for low-wage Black and other minority workers over the coming generation,” Johnson said in a statement last November. “So far, we have seen great interest from employers—and we encourage all plan sponsors to learn about how this solution can help their employees greatly improve their retirement security.”

Major changes predicted

According to the PLANSPONSOR website, the move will enable digital, automatic portability of 401(k), 401(a), 403(b) and 457 account balances of less than $7,000 from plan to plan at the point when workers change jobs.

RCH modeled the implementation of the new system and made a number of predictions about how the auto-portability improvements would affect retirement savings for workers.

The first finding was that workers with lower balances—those with retirement savings at $7,000 or below, will be subject to mandatory distribution provisions, under the SECURE 2.0 Act. “The model predicts that over the next 40 years, 342.2 million job-changing participants will be subject to mandatory distribution provisions, regardless of whether auto portability is adopted [by individual employers] or not,” the report said. “This represents an increase of 116.2 million participants (34%) over the prior model.”

Related: The true cost of ‘forgotten’ 401(k) accounts: $1.65 trillion

In addition, the new model projects that auto portability will grow net incremental wealth of American workers by $1.6 trillion, compared to a system with no auto portability.

“Over 40 years, under auto portability, 175.6 million job-changing participants will consolidate (“roll-in”) appreciated retirement savings of $1.75 trillion, vs. $155.2 billion without auto portability,” the report said. “That places the net incremental wealth generated by auto portability at $1.6 trillion, a figure which is in the ballpark of a prior 2019 EBRI analysis, which calculated the present value of retained savings due to auto portability at $1.5 trillion for accounts less than $5,000, and $2.0 trillion in benefits for all balances.”

A major improvement in savings for lower-income Americans

With women, minorities, and lower-income Americans bearing a disproportionate share of the lost savings under the old system, the new analysis found that those groups will derive more benefit from auto portability over coming years.

“Expanded DC access will allow participation levels to mirror underlying population demographics,” the report said. “As participation increases for minority demographic segments, these segments will derive disproportionate benefits from auto portability. In the 40-year modelling period, under auto portability 98 million minority job-changers with balances less than $7,000 will preserve an incremental $744 billion in retirement wealth, while 30 million Black Americans will preserve an incremental $216 billion in retirement wealth.”

RCH said in a statement that further legislation may continue to improve the accessibility for Americans who change jobs. “On 12/13/23, a bipartisan bill was introduced in the U.S. Senate, allowing the rollover of Roth IRA savings into a Roth workplace retirement plan,” the statement said. “According to American Retirement Association (ARA) CEO Brian Graff, this could ‘benefit workers in multiple ways’ and reduce ‘retirement savings leakage by allowing the seamless transfer of Roth Savings through the auto-portability process.’”