Workers with employer-sponsored 401(k) accounts and other defined contribution retirement plans lose an estimated $92.4 billion every year when they change jobs, a problem that new legislation in Congress aims to solve by automatically moving that money into new accounts.
The bill – the Advancing Auto-Portability Act of 2022 (H.R. 9252), introduced Oct. 28 by Rep. Brad Schneider (D-Illinois) – would create incentives for plan managers to automatically move the 401(k) account of workers changing jobs from the former employer’s plan to the new employer’s plan.
For assistance understanding how this bill would affect you and additional help planning your retirement, consider matching with a financial advisor for free.
Inside the Automatic 401(k) Rollover Legislation
The Advancing Auto-Portability Act of 2022 would stem what retirement plan managers call “leakage” from 401(k)s that frequently happens when workers with less than $5,000 in their accounts change jobs. If the account is worth less than $1,000, the employer plan can simply cash out the worker by sending a check for the full balance. That money not only is considered taxable income, but if it’s not deposited in a new qualified retirement account, it’s also considered an early withdrawal that hits the account holder with an additional 10% penalty.
If that account balance is between $1,000 and $5,000, the employer plan can transfer the balance to an Individual Retirement Account. These “forced-transfer IRAs” are invested in low-risk, low-return investments but can also charge annual fees that continually eat away at the balance. A 2014 study from the Government Accountability Office identified 19 different forced IRAs and found that 13 had low returns and high fees that would wipe out a $1,000 account in 30 years or less, with one plan eating up the entire account in nine years.
The bill would allow plan managers to create a system that would allow workers to locate old accounts and easily transfer the money into their current employer’s account. The Employee Benefit Research Institute has estimated that ending the cash-out of old accounts would keep as much as $1.5 trillion in retirement accounts over 40 years.
A very similar plan was announced early in October by Fidelity Investments, Vanguard Group and Alight Solutions – three of the largest 401(k) administrators – to create Portability Services Network, a consortium working with Retirement Clearinghouse to reconnect workers with old 401(k)s.
The House measure is related to a similar Senate bill – the Advancing Auto Portability Act of 2022 (S.4406) introduced in June by Sens. Sherrod Brown (D-Ohio) and Tim Scott (R-South Carolina). That legislation would give a tax credit of $500 to employers participating in an automatic rollover program. A provision in the EARN Act (S.4808), introduced in September by Sens. Ron Wyden (D-Oregon) and Mike Crapo (R-Idaho), also would permit employers to provide automatic rollovers to a new employer’s 401(k) plan.
The Employee Benefit Research Institute estimates that close to 15 million workers with 401(k) plans move to new employers every year.
The proposed legislation would apply to all defined contribution plans from employers. Besides the well-known 401(k) accounts, other plans are the Roth 401(k); 403(b) and 457(b) plans, including Roth versions; SEP IRAs and SIMPLE IRAs; Thrift Savings Plans (TSP), including Roth versions; profit-sharing plans; money purchase/401(a) plans; and employee stock ownership plans (ESOPs).
Rep. Brad Schneider (D-Illinois) introduced the Advancing Auto-Portability Act of 2022 (H.R. 9252), which would create incentives for plan managers to automatically move the 401(k) account of workers changing jobs from the former employer’s plan to the new employer’s plan. Retirement savers stand to be able to protect their nest egg, keep better track of retirement savings and find missing retirement money.
Tips for Retirement Planning
- A financial advisor can help you create a retirement plan based on your financial needs and goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Social Security may also prove to be an important part of your retirement plan. If you want to know how much money you can get from Social Security, SmartAsset’s free calculator can help you get an estimate.
Photo credit: ©iStock/YinYang, ©iStock/BrianAJackson