Automatic portability – a retirement plan solution designed to simplify low-balance 401 (k) rollovers – may soon be more widely available. Avant-garde with Retirement Clearinghouse LLC (RCH) to bring to market an automatic portability service for pension plan sponsors, committees and members. The objective is to facilitate the rollovers of small sales. In addition, to limit leakage from the 401 (k) scheme and improve the chances of successful retirement savings investments. The service is expected to launch in mid-2022.
Why is automatic portability a solution that plan sponsors and committees should consider? Data from Vanguard 2021 showed that 401 (k) participants with smaller balances typically do not roll over their retirement savings into new plans. They also do not use other types of tax-efficient options when changing 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 of moving the assets out of the plan and into a Safe Harbor Individual Retirement Account (IRA). . A major downside to this is that the fees for Safe Harbor IRAs tend to be higher. Another problem is that this often results in a proliferation of failed Safe Harbor IRAs. These are rarely claimed by former participants or consolidated into other retirement savings accounts. Participant withdrawals are also common. Both put savings and future investment returns at risk, which can negatively impact retirement outcomes.
The RCH Auto Portability program automates the transfer of an employee’s retirement savings from their former employer’s plan to an active account with their current employer. The goal of the automatic portability solution is designed to help reduce pension plan leaks that occur through member withdrawals and account abandonments. The portability program was initially piloted in 2017 and achieved the first fully automated end-to-end transfer from a Safe Harbor IRA to an employee’s active retirement account with their current employer.
In addition to simplifying rollovers and reducing plan leakage, the automatic portability service also provides administrative benefits to plan sponsors and committees. This not only simplifies administration, but also improves plan compliance – another fiduciary benefit – by reducing the occurrence of abandoned accounts and uncashed checks (which the and published guidance on).
Automatic portability is because of its benefits – the ability to proactively impact cash-out leaks, missing attendees, and abandoned 401 (k) accounts. While the Vanguard / RCH automatic portability solution is relatively new, it has the potential to move the industry forward while simplifying plan administration and improving compliance. It can also help preserve retirement savings and improve results. Other companies could follow with similar portability solutions. Automotive portability is definitely a segment of the market for plan sponsors and committees to watch and monitor future developments.
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff is also executive director of The Plan Sponsor University and is currently a professor at The Retirement Adviser University.