DOL guidance gives OK to retirement savings auto portability program
The Department of Labor has issued a final prohibited transaction exemption for Retirement Clearinghouse’s auto-portability program, a move which may decrease the likelihood employees cash out their retirement plans when they switch jobs.
DOL posted the exemption on Wednesday in response to a request for relief from the clearinghouse, a financial technology services company that works with plan sponsors and service providers. Auto-portability — or the automated movement of employee’s money from a former employer’s retirement plan to their account at a new company — has been touted as a way to minimize the leakage of retirement savings, experts say.
“The cashout leakage problem is severe and requires action,” says Spencer Williams, CEO of Retirement Clearinghouse.
About 22% of all defined contribution plan participants change jobs each year. Of that number, 31% will cash out their retirement savings completely, Williams says. Research has found that about two-thirds of those employees cash out for reasons other than a financial emergency.
Proponents of auto-portability say it can help plan sponsors maintain their fiduciary responsibility to participants — by improving outcomes, financial wellness and mitigating cybersecurity risks, while simultaneously lowering expenses. It also may create room for retirement plan auto enrollment down the road, Williams says.
“Plan sponsors in specific segments of the economy with high labor turnover, [for example,] retail, will benefit even more,” Williams says. “By addressing their chronic small account problem, auto portability will pave the way for these industries to adopt auto enrollment, which has been clearly demonstrated to increase overall plan participation, but particularly amongst minorities.”
DOL’s exemption allows Retirement Clearinghouse to receive “certain fees in connection with the transfer under the RCH Program, of an individual's default IRA or eligible mandatory distribution account assets to the individual's new plan account” without the employee’s consent. Workers, however, can choose to opt out of the program.
One opponent of the exemption argued that funds should only be rolled out of an employee’s retirement account at their discretion. If the new plan has higher fees, or does not accept Roth contributions, it may not be in the employees best interest, the commenter wrote in the draft guidance.
Regardless, Jan Jacobson, senior counsel for retirement policy at the American Benefits Council says the move would be positive for both employers and employees.
“We believe this is an excellent first step in helping ensure that retirement plan assets follow the terminating employee to their new employer and/or reunite lost benefits with the participant. The latter could have a significant effect on the missing participants’ problem,” she says.