New legislation introduced in the Senate this week would allow workers’ 401(k) savings accounts to be automatically rolled over from a previous employer to a new employer.
The legislation, known as the Advancing Auto-Portability Act of 2022, was introduced by Senators Tim Scott, R-South Carolina, and Sherrod Brown, D-Ohio. According to a statement from the senators, the legislation would cut red tape to help Americans who change jobs frequently increase their retirement savings.
“For too many Americans, the security of retirement savings after a lifetime of hard work is too far out of reach,” Scott said in a press release. “Making it easier for workers to build savings will alleviate stress for families and ensure every person has the opportunity to retire with dignity, regardless of their income or economic status.”
Retirement industry research shows nearly four out of every 10 people who left a job cashed out their balances after termination within a 10-year period; those with accounts of less than $1,000 were most likely to cash out. Withdrawals of 401(k) balances are usually treated as income and can incur substantial federal and state taxes, a study from Alight Solutions says. In most cases, people who take money out pre-retirement are also charged a 10% penalty tax.
“The sooner we can make auto-portability the standard for all small, terminated accounts, the better it will be for workers, plan sponsors, service providers and, collectively, the country,” Alison Borland, Alight Solutions wealth and well-being solutions executive vice president, said in the press release.
Severe leakage often occurs when workers move to a new employer, particularly when they have only small accounts. They then must completely start over when it comes to saving for retirement, said Spencer Williams, Retirement Clearinghouse founder, president and CEO, in a statement. He noted that, by using technology to save both time and resources, auto-portability could be a powerful way to stem plan leakage.
“401(k) savings portability will institute a new default in plan designs, which will enable participants to opt out of having their small balances automatically moved to their new employers’ plans when they change jobs, instead of having to opt in,” Williams said. “Senators Scott and Brown have crafted legislation which would make this default available to all plans across the U.S. retirement system—a huge win for America’s hardworking retirement-savers.”
The introduction of this bill follows a series of actions taken on Capitol Hill aimed at increasing retirement security by creating additional protections for workers and businesses.
Just this week, the Senate Health, Education, Labor and Pensions Committee voted to advance the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act, known as the RISE & SHINE Act. Last month, two senators introduced the Increasing Small Business Retirement Choices Act that would reduce retirement plan costs for small businesses by allowing expenses to be reimbursed from plan assets.
In April, the Information Needed for Financial Options Risk Mitigation Act, aka the INFORM Act, was reintroduced in the Senate. That bill would require pension plan sponsors to provide retirees and participants with “critical information” about the trade-offs involved when employers offer a lump-sum payment option from a traditional defined benefit pension plan that can be drawn in place of a lifetime annuity option.
Separately, the House of Representatives easily passed the Securing a Strong Retirement Act earlier this year.