U.S. Sens. Tim Scott (R-SC) and Sherrod Brown (D-OH) introduced a new bill called the Advancing Auto-Portability Act of 2022, which aims to allow employees with 401(k)s to automatically roll over their savings from old jobs to new ones. This legislation is intended to help Americans who change jobs often to increase their retirement savings. If passed, the bill will go into effect in 2024. Let's break down how it could affect you.
A financial advisor could help you save for retirement and select investments that align with your financial goals.
What's in the Auto-Portability Bill?
Two senators have come together to introduce the Advancing Auto-Portability Act of 2022, which aims to allow retirement plan participants to automate 401(k) transfers.
"Auto-portability" is a service that is designed to help workers save their 401(k) balance from a previous employer and roll it into a new account with a current employer.
To do this, the act proposes to provide incentives for the use of automatic portability arrangements under defined contribution plans.
The bill needs to be passed by both the Senate and House of Representatives for approval. If passed, it will take into effect after Dec. 31, 2023.
"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 statement. "I encourage my colleagues to join me in supporting this bipartisan, common-sense legislation that will create a more secure financial future for countless Americans."
According to the proposal of the new bill, up to $105 trillion in retirement savings is cashed out each year when employees change jobs. The proposal says that automated 401(k) transfers will encourage the private sector to reduce those cash-outs.
"This is a simple solution that allows Ohio workers to change jobs and take their retirement savings with them," Brown said in the statement.
This new bill would provide open participation for individuals, who either decide to enroll in the auto-portability offering or decline it. There would also be a 30-day pretransaction notice from the auto-portability provider to the individual, which would notify the individual of any fees attached to the transaction.
The bill also notes that no later than three business days after an automatic portability transaction, the provider will provide notice to the individual of all relevant information related to his or her retirement account.
How Would Auto-Portability Protect Retirement Savers?
This bill would help individuals automatically roll over their retirement savings to an account with a new employer. It could help prevent workers from forgetting about small accounts or having them cashed out automatically.
Plan sponsors also benefit from this feature, as they should generally see fewer incidences of uncashed distribution checks and other administrative headaches.
Auto-portability can provide a valuable safety net for individuals in two additional ways:
You can avoid early withdrawal penalties. Auto-portability encourages individuals to keep their money in qualified retirement accounts and avoid penalties associated with cashing out their retirement investments early.
Distributions are generally subject to a 10% penalty if the withdrawal is made before you are 59 1/2 years old (with exceptions in certain cases). Rolling an account directly to a new employer's platform can help savers avoid early withdrawal penalties and keep other tax and investment benefits associated with the account.
You can keep money in the market. When workers opt to cash out of their retirement account with a former employer, it removes their money from the markets. This may cause them to lose out on long-term investment gains.
The automatic rolling over of accounts could encourage workers to keep their money invested in the markets – and reap those long-term returns.
How Much Forgetting a Retirement Account Can Cost
Forgetting a 401(k) account can add up quickly if fees are high or investments are not appropriate for your life stage or risk tolerance.
For example, 401(k) fees can range between 0.2% and 5% of total assets. And neglecting to move an account from a high-fee one to a low-fee one could cost you.
To illustrate this, let's say you invest $55,000 in an account yielding 9.2%. If one 401(k) charges 0.4% and another platform charges 0.85%, the cost of keeping your money in the high-fee account could snowball over time, according to retirement rollover service Capitalize. In fact, the difference would be $90,000 over 30 years.
Moving between jobs can be difficult when you're trying to keep your 401(k) account active. This auto-portability bill proposed by two senators aims to limit the leakage in 401(k) transactions. That way, employees can avoid fees and penalties, and keep their money invested for long-term retirement savings.
Tips for Retirement Savings
If you have questions about retirement planning, consider working with a financial advisor. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Saving for retirement while moving from different jobs can be challenging and you might elect to do-it-yourself investing to save costs. The longer your money is in a 401(k), the greater your return on your savings will be.
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