Secure 2.0 Creates an Important Opportunity to Improve Retirement Savings Portability
By Catherine Reilly
The U.S. retirement system relies on each individual employer to separately offer a retirement saving plan to their employees. However, employees do not typically stay with the same employer for their entire working lives; indeed, the median tenure with one employer is only five years. During a 40-year working career, participants could easily accumulate eight or more retirement accounts with different providers.
Recent policy reforms, including the passage of the SECURE 2.0 Act in December 2022, now provide an opportunity to significantly improve retirement savings portability to the benefit of participants, employers, and retirement plan providers. As policymakers and industry work to implement these reforms, it is worthwhile to look at the experience of other countries, including Australia, that shows it can be done.
Today’s Fragmented System Makes it Difficult for Savers to Build Wealth
Having multiple accounts is suboptimal for participants for many reasons. First, it is more expensive than consolidating all assets into one account. Second, the investment mix is unlikely to be optimal — participants will find it challenging to manage their assets effectively among multiple plans. This may also make it more difficult to convert accumulated savings into income at the time of retirement.
Finally, having multiple assets makes it more difficult for participants to build meaningful wealth. Participants with balances below $5,000 can be forced out of the employer plan upon separation. Savers may also lose track of some of their accounts and not be able to access money they have saved — research by Boston Research Technologies showed that 33% of respondents had a retirement account with a previous employer that they were not aware of.
It would be preferable for participants to consolidate their retirement savings into one account as they progress through their careers. However, this is currently easier said than done. While transferring assets from a 401(k) to the same provider’s IRA can be very easy, there is no “transfer now” button that participants can press to initiate an automated roll-in to a new employer’s 401(k) plan when they change jobs. Instead, they usually must call the previous plan provider to request that a paper check be mailed to them. Once they have received this check, they must mail it to the new plan provider. This process is likely to take a minimum of two to three weeks (often considerably more), during which time the money is out of the market. The receiving plan may also refuse to accept the assets without a separate written statement attesting that the assets originate from a qualified retirement plan.
These multiple manual steps introduce significant friction and make it likely that most participants will not roll assets into a new employer’s 401(k). Participants who are being forced out of their previous employer’s plan due to their low account balance are especially likely to prefer to simply cash out when faced with this complexity rather than transfer to a new employer’s plan, thus effectively losing their savings for retirement.
Recent Policy Actions and SECURE 2.0 Create an Important Opportunity
To its credit, the private sector has taken some steps to address this problem. In 2022, three major recordkeepers, together with portability provider Retirement Clearing House (RCH), announced that they had developed the Portability Services Network to enable the automatic portability of small accounts that could otherwise be forced out of employer plans. SECURE 2.0 provides a safe harbor for automatically transferring these assets to the new employer’s plan. This initiative will certainly facilitate the consolidation of small accounts and reduce leakage among the participating recordkeepers, and other recordkeepers are invited to join them. However, participants with balances above the force-out limit who want to consolidate their accounts will still have to contend with the burdensome manual process described above.
As part of the SECURE 2.0 Act, federal legislators also chose to tackle the problems related to lost or stranded accounts. The new Act directs the U.S. Department of Labor (DOL) to establish a retirement account “Lost and Found” in the form of an online database leveraging information provided by all the retirement plan administrators that savers will be able to use to search for their old retirement accounts. Now that the DOL must build this industry-wide database, there is a golden opportunity to leverage this more broadly to improve portability. President Biden’s fiscal year 2024 budget proposal includes funding for DOL to implement this provision, and it will be important for resources to be available to implement it.
Australia and Other Countries Have Shown It Can Be Done
Other countries provide some instructive examples of how to automatically consolidate participants’ savings in connection with job changes or make it very easy for participants to consolidate their assets.
In Finland, which has a consolidated national DB system, a participant’s pension is paid by the last plan that they contributed to, and that plan invoices the previous providers for the share of the income accrued under them. In Norway, a participant’s assets are contained in a personal retirement account that follows them throughout their career, allowing the assets to be managed according to the plan chosen by each employer or by an external advisor. In Australia, the taxation office provides a cost-free digital hub that participants can use to locate and consolidate their superannuation retirement accounts within a few days, without the need for manual procedures or burdensome attestations. The share of savers with only one retirement account in Australia has risen steadily, from 67% in 2019 to 75% in 2022.
Tackling Portability Will Boost Retirement Assets
As they look to implement the most recent set of reforms, federal legislators and regulators could take several steps to remove friction from the system.
First, they could work with the industry to establish harmonized data standards so all the information needed for transfers, including the qualified status of the assets, could be provided in a standardized digital format.
Second, they could extend safe harbor to retirement plans for accepting assets without any need for separate written attestations, providing that these data standards are adhered to.
Third, they could leverage the Lost and Found database to build a centralized hub for data transfer between retirement plan administrators and a simple digital interface that participants could use to request asset transfers from one plan to another. This central hub could also be used to support other important SECURE 2.0 reforms, such as transfers between the government and private retirement plans.
For example, the Saver’s Match, which will come into force in 2027, will require the IRS to pay a refundable tax credit into the retirement accounts of eligible individuals. The system for making these payments into 401(k) plans does not yet exist. If all the retirement plan providers were already connected to the Lost and Found hub with a standardized process for accepting roll-in assets, it would significantly facilitate payment of the Saver’s Match contributions.
Policymakers and the industry clearly understand the significant benefits of reducing the number of lost accounts and making it easier for workers to track, consolidate, and preserve all their retirement savings over their working lives. For participants, a streamlined, digital process for efficiently consolidating retirement assets would lower costs, improve investment allocations, and reduce the probability of losing assets. For employers, it would reduce fiduciary risk and the challenges associated with small balances. Plan providers would benefit from managing larger average account balances. Consolidated accounts would also make it easier and more cost-effective to provide retirement income solutions to participants, thus advancing policymakers’ key retirement goal of income security in retirement.
Other countries have shown that it is possible. Now is the time for the U.S. to get it done. Facilitating portability and account consolidation are two of the most important ways to boost retirement savings and enhance the effectiveness of current and future policy reforms.
Catherine Reilly is a retirement and investment expert with a particular focus on emerging financial technology and public policy.
March 2023, 23-02
Association of Superannuation Funds of Australia (AFSA), Developments in the Number and Cost of Multiple Superannuation Accounts, 2021.
Center for Retirement Initiatives at Georgetown University, Auto-portability: What it is, Why it’s Needed, and How it Will Strengthen Retirement Security, 2020.
Department for Work and Pensions, Pensions Dashboards Programme Progress Update Report, 2021.