DOL proposes rule to reduce leakage in 401(k) plans

DOL proposes rule to reduce leakage in 401(k) plans
Proposal promotes 'auto-portability' as a way to reconnect plan participants with retirement savings they've left behind.
NOV 08, 2018

The Department of Labor proposed a rule late Wednesday that's meant to stanch the flow of money out of 401(k) plans, an issue that has long troubled retirement policymakers. The Labor Department's proposal promotes the idea of "auto-portability," a mechanism that automatically reconnects plan participants with 401(k) savings they may have inadvertently left behind or forgotten about after leaving a prior employer. Current rules allow companies to jettison the small 401(k) account balances of former employees. These cash-outs by employers, as well as voluntary cash-outs initiated by employees, represent a major source of "leakage" from 401(k) plans. Policymakers say leakage reduces individuals' overall retirement wealth, an effect that's compounded by the frequency with which employees change jobs and by automatic enrollment, which creates a greater number of small plan balances. The Government Accountability Office found that 25 million participants in workplace plans separated from an employer and left at least one account behind in the decade from 2005 to 2015, according to an October 2017 report. Millions left two or more accounts behind, the GAO found. The Center for Retirement Research at Boston College found that 401(k) plan leakage causes a 25% reduction in aggregate retirement wealth, according to a 2015 analysis. The study looked at cash-outs as well as in-service withdrawals, such as a hardship distribution. "Leakage is absolutely an issue," said Marcia Wagner, principal at The Wagner Law Group. "This is probably a way for the DOL to say, 'We're trying to do something that's not controversial to deal with the leakage problem.'" The DOL's proposed rules, which only apply to account balances of less than $5,000, seek to exempt one firm, Retirement Clearinghouse, from certain restrictions under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. Retirement Clearinghouse has an auto-portability mechanism that identifies participants who have left an employer, rolls their small 401(k) accounts into an IRA, detects when the individual has landed at a new employer, and then automatically rolls the money into that individual's new 401(k) plan. This is meant to consolidate an individual's retirement accounts that have been left behind and prevent employers from cashing out accounts of former employees. (Currently, employers can cash out accounts smaller than $1,000 by sending a check to the participant. To get rid of accounts with balances between $1,000 and $5,000, employers must roll the money into an IRA set up on the employee's behalf.) Retirement Clearinghouse, which is a fiduciary in its transactions, needs a rule exemption because it receives a transfer fee in connection with its services. Current rules don't allow fiduciaries to receive additional fees for such transfers absent an individual's consent. The DOL said that it is only proposing to grant the exemption from these rules for five years, since the RCH program is new, and the DOL "cannot confidently determine how successful the RCH program will be at achieving its objectives." Comments are due by Dec. 24. (More: Loosened rules at odds with efforts to cut 401(k) loans, hardship withdrawals)

Latest News

RIA moves: NorthRock adds $800M Parkside Advisors, NFP acquires Levine Group in Tennessee
RIA moves: NorthRock adds $800M Parkside Advisors, NFP acquires Levine Group in Tennessee

NorthRock Partners' second deal of 2025 expands its Bay Area presence with a planning practice for tech professionals, entrepreneurs, and business owners.

Hightower taps Osaic alum Scott Hadley as first chief advisory officer, expands C-suite
Hightower taps Osaic alum Scott Hadley as first chief advisory officer, expands C-suite

Hadley, whose time at Goldman included working with newly appointed CEO Larry Restieri, will lead the firm's efforts at advisor engagement, growth initiatives, and practice management support.

Clients are nervous about volatility, but advisors know they need to stay the course
Clients are nervous about volatility, but advisors know they need to stay the course

Survey reveals how cutting through the noise is advisors' superpower.

Why the 'forgotten generation' is a powerful force in wealth management, consumerism
Why the 'forgotten generation' is a powerful force in wealth management, consumerism

Gen X is a powerful cohort that controls huge wealth but also faces retirement challenges.

RIA moves: True North adds $353M California RIA as SageView grows North Carolina presence
RIA moves: True North adds $353M California RIA as SageView grows North Carolina presence

Plus, a $400 million Commonwealth team departs to launch an independent family-run RIA in the East Bay area.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.