A no-brainer retirement benefit advisers can bring to their clients

The recent passage of widely praised legislation known as SECURE 2.0 reinforces a bipartisan commitment in Congress to help Americans save more for retirement — a challenge our industry is poised to advance.  

Signed into law December 29 as part of a $1.7 trillion omnibus spending bill, the Securing a Strong Retirement Act of 2022 includes a variety of provisions, including the expansion of automatic enrollment in 401(k) and 403(b) plans. Also included in SECURE 2.0 is a provision that raises the limit for mandatory distributions to $7,000 from $5,000, thereby expanding auto portability's benefits to a larger population.

SECURE 2.0 measures related to auto portability come shortly after the launch of an industry initiative to improve the accessibility of auto portability for plan sponsors across the U.S. This technology solution can operate in tandem with auto enrollment to optimize plan participants' retirement readiness. 

In October 2022, three of the largest retirement plan recordkeepers announced the creation of a consortium of workplace retirement recordkeepers. Portability Services Network (PSN) was established to function as an industry utility for automatically moving 401(k), 401(a), 403(b) and 457 account balances of under $5,000 from plan to plan at the point when participants change jobs. 

Read more: Targeting small, uncashed 401(k) distribution checks can generate big savings

PSN will utilize the auto portability solution to build a digital, nationwide hub connecting retirement plan recordkeepers and sponsors. Auto portability is the routine, standardized and automated movement of an employee's retirement savings account with less than $5,000 from their former employer's plan into an active account in their current employer's plan. 

This innovation was created to resolve two ongoing challenges for the U.S. retirement system: the proliferation of small accounts with less than $5,000 from terminated participants in employer-sponsored plans and the tremendous leakage of retirement savings. 

According to the Employee Benefit Research Institute (EBRI), approximately $92 billion in savings leaves the nation's retirement system every year. The reason? Too many working Americans who switch employers choose to prematurely cash out their retirement savings accounts, and pay taxes and penalties on those early withdrawals. Why? Because plan-to-plan asset portability has historically been expensive and time-consuming without help, and cashing out is often viewed as the simplest option by participants when they leave their jobs for new employment. 

By automating and simplifying plan-to-plan savings portability at the point of job-change, auto portability makes it possible for participants to consolidate their retirement account balances throughout their working lives. 

EBRI estimates that auto portability, if adopted nationally, would preserve an additional $1.5 trillion in savings in the U.S. retirement system over the course of a 40-year period as measured in today's dollars. This sum would include $619 billion for 67 million Black and minority workers, and $365 billion for 42 million women participants.

Read more: Improve retirement readiness by avoiding cash-outs and consolidating 401(k)s

But auto portability also helps plan sponsors. Enabling the seamless consolidation of participants' retirement savings accounts helps sponsors get rid of small, stranded accounts dragging down their plans. This would allow them to reduce administrative hassles and missing participants, increase average account balances and strengthen financial wellness programs offered to participants. 

According to a case study by Boston Research Group focusing on a large plan sponsor in the healthcare services sector, the use of auto portability resulted in a 48% increase in the average account balances of the sponsor's plan participants.

Making businesses and institutions that sponsor retirement savings plans for employees aware of the benefits of auto portability presents an easy opportunity for financial advisers and wealth managers. In a nutshell, they're able to demonstrate value for their clients – and, in the process, grow their practices.