Auto Portability Breaks New Ground

Offering Employee BenefitsAuto portability – a retirement plan solution designed to simplify small-balance 401(k) rollovers – may soon be more widely available.  Vanguard recently announced a partnership with Retirement Clearinghouse LLC (RCH) to bring to market an auto portability service for retirement plan sponsors, committees, and participants.  The goal is to make small-balance rollovers easier.  Also, to limit 401(k) plan leakage and improve retirement savers’ chances of investment success.  The service is expected to launch in mid-2022.

Why is auto portability a solution retirement plan sponsors and committees should consider?  Data from Vanguard’s 2021 “How America Saves” report showed that 401(k) participants with smaller balances typically don’t rollover their retirement savings into new plans.  They also do not use other types of tax-advantaged options when they switch jobs.  In addition, often when a participant leaves behind a retirement account with a balance of less than $5,000, plan sponsors have the option to transfer the assets out of the plan and into a Safe Harbor individual retirement account (IRA).  One major drawback to this is that fees for Safe Harbor IRAs tend to be higher.  Another issue is this often results in a proliferation of stranded Safe Harbor IRAs.  These rarely get claimed by former participants or consolidated into other retirement savings accounts.  Participant cash-outs are also common.  Both put future savings and investment returns in jeopardy, which can negatively impact retirement outcomes.

The RCH Auto Portability program automates the movement of an employee’s retirement savings from their former employer’s plan into an active account with their current employer.  The goal of the auto portability solution is designed to help reduce retirement plan leakage that happens through participant cash-outs and account abandonments.  The portability program was originally piloted back in 2017, and completed the first fully automated, end-to-end transfer of a Safe Harbor IRA into an employee’s active retirement account with their current employer.

In addition to simplifying rollovers and reducing plan leakage, the auto portability service also offers administrative benefits for retirement plan sponsors and committees.  It not only simplifies administration, but also improves plan compliance – another fiduciary benefit – by reducing occurrences of abandoned accounts and uncashed checks (which the DOL recently prioritized and issued guidance on).

Auto portability is gaining ground because of its benefits — the ability to proactively impact cash-out leakage, missing participants and abandoned 401(k) accounts.  While the Vanguard/RCH auto portability solution is relatively new, it has the potential to help move the industry forward while simplifying plan administration and improving compliance.  It may also help preserve retirement savings and improve outcomes.  More companies may follow on with similar portability solutions.  Auto portability is definitely a segment of the market for retirement plan sponsors and committees to watch and monitor future developments.

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