New Legislation for Reducing Premature Retirement Savings Cashouts
United States Senators Tim Scott (R-S.C.) and Sherrod Brown (D-OH) have introduced the Advancing Auto Portability Act of 2022, which would make it easier for workers to keep their retirement savings with them when they switch jobs. The bill aims to encourage the adoption of auto portability programs.
Currently, when workers with less than $5,000 in retirement savings leave their job, they often cash out their retirement savings, which can lead to significant long term financial losses. According to Boston College’s Center for Retirement Research, if a participant prematurely cashes out their 401(k), they can lose as much as 25% in potential savings for their retirement.
According to the Employee Benefit Research Institute, 31% of the 14.8 million people with 401(k) accounts who change jobs every year will cash out their accounts within one year of the change. However, it is estimated that increased adoption of auto portability would result in an additional $1.5 trillion in retirement savings over 40 years.
The Advancing Auto Portability Act of 2022 would incentivize employers who adopt auto portability with a tax credit of $500 if they offer this option to their employees. Employees should be notified 30 days prior to the transaction and be allowed to opt out.
The legislation also sets some ground rules for automatic portability providers, including:
- Providing written acknowledgment that it is a fiduciary for the owner of the IRA
- Limiting fees so they do not “exceed reasonable compensation”
- Forbidding the marketing or selling of information related to the IRA
- Providing services on the same terms to all plans
• Keeping records for a minimum of six years and conducting annual compliance audits.
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