Portable 401(k) Plans Stumble on Incentives for Industry Buy-In

Federal policymakers promoting 401(k) plan portability options face an uphill battle obtaining universal Wall Street buy-in, threatening to hamper the success of a plan to let small-balance accounts automatically follow workers who switch jobs.

The US Labor Department is working on a rulemaking project mandated by Congress through the SECURE 2.0 Act to cut administrative red tape and let 401(k) balances move even when a worker hasn’t directly consented.

It’s part of a wholesale effort in Washington to reduce leakage from employer-sponsored plans in the US and avoid workers losing track of their savings.

But plan sponsors wouldn’t be required to allow money to follow former workers under the DOL’s current proposal (89 Fed. Reg. 5624), and retirement industry analysts say third-party service providers called recordkeepers have few incentives to offer their clients auto-portability products on their own.

Without widespread adoption, some small-dollar balances may still get lost, and workers could face navigating a patchwork of 401(k) portability options alone, they say.

“For a lot of service providers, especially major players in the 401(k) space, these provisions aren’t necessarily in their best interest,” said Andy Larson, director of retirement education at the Retirement Learning Center, a Chicago-based plan consulting firm. “I’m not sure all the players in this industry see auto-portability as something that’s going to directly benefit their service models for asset accumulation.”

Employers already have the option of rolling over small-balance accounts into conservatively invested individual retirement accounts, often sponsored by their own plan provider.

With the minimum threshold for auto-rollovers already on the rise, recordkeepers seemingly stand to gain more business by keeping money under internal management where they can charge fees for service, rather than willingly handing it over to a competitor.

‘Particular Need’

Auto-portability has its investment management proponents. Some of the country’s biggest recordkeepers, including Alight, Empower, Fidelity, Principal, and Vanguard banded together under an automatic transaction precursor dubbed the Portability Services Network in 2023.

DOL’s Employee Benefits Security Administration has modeled its proposed auto-portability rule after temporary individualized guidance it gave a company launching the PSN in 2018 and 2019.

“There is a particular need for automatic portability solutions that help ensure participants remain connected to their retirement savings when they change jobs,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez when the proposal was unveiled in January.

The department said auto-portability would reduce plan leakage, which occurs when workers cash out of their savings and lose out on the benefit of future compounding interest.

DOL’s rule would require direct input from participating recordkeepers, including plan description documents and designated monitors. Tim Rouse, executive director of the SPARK Institute, which represents some of the nation’s largest 401(k) recordkeepers, said members are generally in favor of the proposal, because auto-portability applies strictly to small-balance accounts.

“If you’ve got a million dollars in a 401(k) account, recordkeepers are going to want to hold onto that,” Rouse said. “That’s just the nature of the business, but that’s not what we’re talking about here.”

‘Not a Silver Bullet’

The SECURE 2.0 Actincreased the minimum balance for automatic account rollovers from $5,000 to $7,000. With enough instances of $7,000 balances funneling into a recordkeeper’s in-house investment management division, the numbers can add up, said Larson.

He said he favors the DOL and IRS working together to expand the benefits, rights, and features rules under the Employee Retirement Income Security Act of 1974 and the tax code to apply in the context of rollovers. A proposal like that would essentially require that recordkeepers allow seamless account balance transfers without putting up any unnecessary hurdles.

Critics of the DOL’s auto-portability messaging say that plan leakage is unlikely if a participant has forgotten about or willingly left an old balance behind. Taken together, auto-portability can work together without abandoning time-tested auto IRA rollovers, said Peter Welsh, head of retirement solutions at Inspira Financial.

“This is not a silver bullet to reducing plan leakage,” Welsh said.

Public comments on the proposed DOL rule remain open until March 29. The agency staff look “forward to evaluating the issues raised and encourage the public to share their views and perspectives with the Department,” an agency spokesperson told Bloomberg Law in an emailed statement.

In January, the Government Accountability Office recommended that Congress go a step further and consider policy solutions that would make auto-portability mandatory, an early signal that voluntary recordkeeper adoption may dwindle.

“The provisions for auto-portability really re-enforce the work and the mission that brought us together to help the minorities, the women, the low-income earners, and young workers who really have this larger propensity to change jobs quite often and often cash-out their small-balance retirement savings,” said Sterling Ingui, head of next generation retirement products at Fidelity.