avant-garde How America Saves report for 2022 gave rise to optimism with some of its conclusions. For example, employee participation rates in defined contribution plans managed by Vanguard remain high and have not declined year over year during the pandemic. The majority of Vanguard plan participants also increased or maintained their contributions last year, and the average account balance of Vanguard participants increased 10% year-over-year to $141,542.
However, the report pointed out that premature withdrawals of small 401(k) balances continue to threaten the retirement readiness of plan participants, especially those who are younger and have fewer savings. Vanguard noted:
“Most participants with a 401(k) balance of less than $1,000 are voluntarily or automatically withdrawn from their retirement savings when they leave an employer, compared to only 7% of participants with a balance over $100,000. Participants who withdraw their retirement savings prematurely risk tax consequences, and may lose future savings and returns if the assets are not reinvested in a tax-sheltered account. »
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Vanguard also said that, to address this issue, “automatic portability services and revisions to minimum balance rules can help reduce withdrawal rates.”
Automatic portability is the routine, standardized, and automated transfer of a retirement plan member’s 401(k) savings account from their former employer’s plan to an active account at their current employer’s plan. Automatic Portability was designed and built to meet the needs of plan participants with account balances below $5,000, who often do not have access to the portability solutions available to their counterparts with larger accounts.
Shortly after Vanguard released this year’s issue How America Saves report, Sen. Tim Scott (RS.C.) and Sen. Sherrod Brown (D-Ohio) presented the Advance the Automotive Portability Act of 2022that would enact measures to enable and encourage the adoption of car portability by plan sponsors and administrative agents nationwide.
This bill would make it easier for plan members to carry consolidate their 401(k) savings balances when they change jobs, helping them avoid the destructive decision to cash out. According Boston College Center for Retirement Research.
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But minorities and low-income workers are disproportionately more likely to make this decision after having change jobs. The Employee Benefits Research Institute (EBRI) found that 14.8 million plan members change employers each year, and according to data from the largest plan managers, almost a third (31 %) of them will cash out their 401(k) account balances. their former employer’s plans within one year of their change of employment.
This collection rate in the year following the job change is higher than the average for plan members who are minorities (63% for Black Americans and 57% for Latinos), earn between $20,000 and $30,000 in annual income (50%) or are between the ages of 20 and 29 (44%). It is also above average for women (41%), and especially those who are between 25 and 34 years old (71%).
EBRI believes that the national adoption of automatic portability would keep until $1.5 trillion in additional retirement savings, measured in today’s dollars, in the US retirement system over 40 years. That sum would include about $191 billion for 21 million black Americans and $619 billion for all minority plan participants.
The Advance the Automotive Portability Act of 2022 would encourage the widespread adoption of automotive portability by creating a tax credit to help companies manage the costs of implementing automatic portability. It would also make the 2019 U.S. Department of Labor guidelines (published specifically at Retirement Clearinghouse) permanent and applicable to any automotive portability provider.
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Legislation, and automotive portability itself, have received bipartisan and widespread support inside and outside Congress. Derrick Johnson, President and CEO of the National Association for the Advancement of Colored People (NAACP), wrote in his letter of support for autoportability: “While autoportability alone does not solve the racial wealth gap, it has the ability to positively support Black workers’ ability to build lucrative retirement investments by creating a streamlined approach to savings; one that reduces opportunities for workers to withdraw their investments. »
Other leaders, including Marc H. Morial, president and CEO of the National Urban League, have identified and expressed the value that automotive portability can have when it comes to closing the wealth gap. Additionally, a 2017 letter from Senator Scott to the Department of Labor on the matter received support from the U.S. Chamber of Commerce, as well as trade organizations including the American Benefits Council, the Investment Company Institute , the Financial Services Roundtable and the Women’s Institute for a Secure Retirement. .
This broad bipartisan support behind automotive portability has been crucial in getting us to this point. If the legislation is enacted, the retirement savings gaps in our society can begin to be closed.