401(k) Auto Portability is a new bill recently introduced in the US Congress. It allows 401(k) accounts to be automatically transferred to a new employer’s plan. This would make it easier for employees to keep their retirement savings when they change jobs.

401(k) Auto Portability Act would create a streamlined process for workers to roll over their 401(k) accounts when they change jobs. When an employee leaves a job, they can cash out their 401(k) or leave it with their former employer. However, many workers are not aware of the option to roll over their accounts to their new employer, and as a result, they often cash out their accounts and incur taxes and penalties.

The Auto Portability Act would create a “portability” feature for 401(k) accounts that would allow workers to automatically roll over their account to their new employer’s 401(k) plan. This would allow workers to keep their retirement savings invested and grow over time while avoiding taxes and penalties.

This article examines how the 401(k) Auto Portability Bill will impact recordkeepers and plan administrators.

Why should retirement plan administration service providers be concerned?

401(k) Auto Portability Bill will positively impact the existing business model of service providers in the retirement industry. When workers leave a job, their 401(k) account is usually cashed out due to early distributions. This creates a “churn” in the system, though it generates revenue for retirement service providers but minimizes future wealth management opportunities.

The Auto Portability Act would end this churn by allowing workers to keep their 401(k) accounts with their new employer. However, it is not a major concern for retirement plan administration service providers, as the bill focuses on small-balance job changers. These participants have a balance of less than $5,000; therefore, they will not conflict with the advisors’ business models.

Implementation of the bill will require full automation to support end-to-end portability. This will positively impact the retirement plan industry, as it will create opportunities for technology providers to develop new solutions that can facilitate portability. The bill is still in the early stages of development, and it will take some time to gain traction. However, once implemented, it can potentially revolutionize the retirement industry.

What challenges will this new bill create?

The new bill will initially create challenges for employers, TPAs, and plan administrators as they must update their systems to accommodate the new rules. It has the potential to help employees address their most significant challenge of keeping track of their retirement savings if they switch jobs frequently.

The benefits of 401(k) Auto Portability Bill

The main benefit of the 401(k) Auto Portability Bill is that employees can easily keep their retirement savings when switching jobs. It is an advantage as it would encourage more people to save for retirement, as they would not have to worry about losing their hard-earned savings if they change jobs. As the number of plan participants increases, recordkeepers and plan administrators will have an additional workload. Adopting technology will enable them to reduce the paperwork and hassle associated with transferring retirement accounts.

How can technology help?

Technology can help automate transferring 401k accounts from one employer to another. It would make it easier for employees to keep their retirement savings when switching jobs. A few companies, like Congruent Solutions, already offer a cloud-based retirement plan administration platform.

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