Under a new federal law, government agencies will facilitate work on the formidable task of helping reunite millions of Americans with retirement accounts they lost by switching jobs or leaving the workforce.
The law passed late last year seeks to address the growing problem of 401(k) and other retirement plan participants who forget about those benefits or lose out on returns by cashing them out early.
Provisions in the SECURE 2.0 Act (Pub.L. 117–328) instruct the US Labor Department to establish the nation’s first government-sponsored lost-and-found database for retirement benefits and sanction portability measures that let accounts automatically follow workers as they move between jobs.
Taken together, the new retirement provisions are designed to reduce plan leakage and missing participants, issues that have plagued plans with liability risks for decades and left billions of dollars unclaimed or steadily trickling out of the workplace benefits system.
In another key provision, SECURE 2.0 will also automatically enroll new hires in workplace plans, establishing new retirement accounts for many full-time American workers. Once auto-enrollment takes effect, it will begin letting retirement benefits accrue on auto-pilot, while setting the stage for millions more workers who may retire or switch jobs having never known they had a nest egg.
“Without auto-portability and these other measures, the expanding access provisions of SECURE 2.0 will be sub-optimal,” said Spencer Williams, president and CEO of Retirement Clearinghouse LLC. “It wouldn’t work.”
SECURE 2.0 Act eliminates the legal uncertainty that’s been swirling for years around the concept of moving former workers’ money without their express consent. Employers that are left with these benefits can now automatically transfer them to the ex-employee’s new job. The law also increases the maximum threshold for offloading old worker accounts from $5,000 to $7,000.
Auto-portability usually needs the expertise of a third-party service provider like Retirement Clearinghouse, which has been doing this work already for several years. But a temporary DOL legal exemption the company relied on to conduct negative-consent benefit transfers was set to expire in a few years. SECURE 2.0 codified it permanently.
That legislative blessing has allowed the company to corral a group of major retirement plan recordkeeping firms that are sharing data to facilitate faster money moves. Retirement Clearinghouse’s Portability Services Network already includes Fidelity Investments (FMR LLC), Vanguard Group Inc., and Alight Solutions LLC, but Williams said more companies are signing on all the time.
“The 2.0 provisions for auto-portability really re-enforce the work and the mission that brought us together to help the minorities, the women, the low-income earners, and young workers who really have this larger propensity to change jobs quite often and often cash-out their small-balance retirement savings,” said Sterling Ingui, head of next generation retirement products at Fidelity.
Besides automatically transferring a worker’s low-balance retirement account to their next job, the US tax code lets employers dump the remaining balances into a risk-free individual retirement account, or IRA. Those usually offer poor overall returns.
Those are the options when an employer can’t get in contact with their former employee to ask them what they want to do with their money. When they do get in contact with them, it can get worse; the employee can choose to cash out, meaning they get hit with a massive IRS penalty and they lose out on all future returns.
Early cash-outs are the worst-case scenario for former workers with low balances, said Williams. Once tax-advantaged savings leave the qualified retirement system as a withdrawal, they can’t go back in. That means potential compounding interest on the principal investment evaporates.
A 2019 Government Accountability Office report found that workers ages 22-55 withdrew $9.8 billion from the retirement system in one year alone. The money was never rolled back into tax-favored plans.
One account totaling about $5,000 can balloon to $35,000 over one worker’s career, meaning the real cost of retirement plan leakage is in the trillions, said Tim Rouse, executive director of SPARK Institute Inc., a trade group representing retirement plan asset managers and recordkeepers.
“There is this overarching desire to keep workers invested in the system,” Rouse said. “In a market that’s $39 trillion, leakage accounts for a lot.”
SECURE 2.0 instructs the Labor Department to use the data it collects on American retirement plans to build a database of plan administrators that workers can use to find out if they have missing benefits. But what happens to those accounts in the intervening time remains a mystery, and convincing retirees to actively seek out balances could be a challenge.
Whereas auto-portability is a solution for retirement savers with accounts totaling up to $7,000, the Labor Department’s new database factors in when those balances are higher. As opposed to automatically shifting that money around, the tax code requires employers to keep those balances in the plan, frozen in time with the same mix of investments, unless the worker actively opts to make adjustments.
That’s bad for investors seeking a balanced approach. A forgotten account designed for aggressive returns when a worker is young could be losing money once the worker returns to the account near the end of their career, said Williams.
Forgetting the account altogether can be worse. Workers who kept their savings with a former employer often don’t keep their contact information up-to-date. The employer has a longstanding fiduciary responsibility to try to find that former employee once the government requires a draw-down on the account, but that can be decades after the worker was last in contact.
“This is a problem that’s been percolating in the retirement system for a long time,” said Carol Buckmann, an employee benefits attorney and co-founder of the firm Cohen & Buckmann PC. “It can involve an extensive, costly search, and it may turn up no results.”
A database can “only go so far” to fix the problem, Buckmann said.
It may mean workers will have to know they have an old account or even what the name of the former employer or account recordkeeper is. Keeping those records up-to-date can be a challenge, too, according to Rouse.
SPARK Institute members are exploring ways to integrate distributed-ledger blockchain technology with worker accounts, so unique identifiers like a Social Security number can follow a worker over the course of their career without the need to conduct an intrusive search at the time of retirement.
Williams said he hopes his Portability Services Network could one-day bolster a Labor Department database by weaving in improved recordkeeper communications technologies to track a worker’s retirement savings from their first job to their last.
Even state governments are weighing in. Each state, territory, and the District of Columbia operates an unclaimed property bureau that handles financial assets and tries to return them to their rightful owners. Those bureaus are equipped to take retirement plan distributions that have not been cashed out, but doing so would require Labor Department guidance.
The ERISA Advisory Council recommended such guidance in a 2019 report to the Trump administration, and Shaun Snyder, executive director of the National Association of State Treasurers, says he’s been in contact with regulators since.
“States have the infrastructure in place now,” he said. “The states are ready to do this kind of work, because they’re doing it already with great success.”
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