Moving retirement savings when switching jobs is about to get easier for millions of workers with small balances.
The changes aim to stem what retirement researchers call a “leakage” of savings from 401(k)s and other workplace retirement accounts when employees change jobs.
Unlike workers with fat retirement accounts, those with less than $5,000 usually can’t leave the funds at a former employer’s plan when they change jobs. (Some employers may allow it, but they don’t have to and most don’t.) Workers end up taking out the money — either voluntarily or because they are pushed out by employers that don’t want to manage a glut of small accounts. Many don’t reinvest the cash, denting their retirement savings.
These “cash outs” can result in significant shortfalls in retirement savings, according to a 2020 report from the Employee Benefit Research Institute.
Almost 15 million people who have a 401(k) change jobs each year, and about a third have balances of less than $5,000, according to an analysis by Retirement Clearinghouse, a financial technology company. More than half of the low-balance workers — roughly three million people annually — cash out in the first year after leaving a job and end up paying taxes and penalties on the early withdrawal, according to an analysis based on data from the Employee Benefit Research Institute, the Labor Department and industry sources.
That is why three big 401(k) administrators — Fidelity Investments, Vanguard and Alight Solutions — recently joined with Retirement Clearinghouse to make it easier to transfer workplace retirement accounts to a new job and keep workers saving and investing for the long term.
The group formed the Portability Services Network, which will act as a hub for locating an employee’s workplace retirement account and automatically transferring the balance to a new employer’s plan.
The consortium says the automatic-transfer option may especially benefit minorities, women and lower-income workers, who tend to have higher cash-out rates when changing jobs.
The worker doesn’t have to do anything, according to the network, which said in an announcement that it aimed to “help America’s underserved and under-saved workers improve their retirement outcomes.” (Under current regulations, the funds must temporarily go into an individual retirement account before moving to the new employer plan, but the network will handle that step as well, said Greg Long, head of public policy at Alight.)
Until now, some retirement plan administrators were reluctant to offer so-called autoportability for small balances because of regulatory uncertainty. But Secure Act 2.0, the retirement law that Congress passed at the end of last year, formalized the automatic transfers and cleared up some confusion — confirming, for instance, that the network may charge fees for its services. (Retirement savers pay a one-time fee based on the size of the balance. The maximum is $30 and is expected to decline as the network grows, executives said.)
The group doesn’t yet include all the biggest retirement administrators, but the three current owners represented about half the 401(k) market in 2021, according to Cerulli Associates, a consulting and research firm for the financial services industry.
Plus, the portability network said that up to three more administrators — record keepers, in industry lingo — may join as owners, and that any number of administrators may join as participants. The network is in talks with other administrators, said Kevin Barry, president of workplace investing at Fidelity.
“It works best when we have broad participation across the industry,” said Steve Holman, a principal in Vanguard’s Institutional Investor Group.
Here are some questions and answers about moving retirement funds.
Why can’t I just leave my retirement money at my old employer?
In general, when you leave a job and your 401(k) balance is over $5,000, employers let you leave the money where it is. (Starting next year, the threshold will increase to $7,000, as part of the rules changed by the Secure Act 2.0.)
If your balance is below $5,000, your employer can choose to drop you from its plan and, if you don’t provide other instructions, deposit your funds in an individual retirement account in your name. Funds in these “safe harbor” I.R.A.s are low risk but also low earning, and their maintenance fees can erode balances over time.
If your balance is less than $1,000, the employer may simply cash out your balance and mail you a check.
Once a check is in hand, it’s tempting to cash it, said Matt Fizell, a certified financial planner in Madison, Wis. But you typically have 60 days to reinvest it in your new workplace account and avoid paying taxes or a penalty. Contact your employer to find out how to proceed.
Is the new portability network up and running?
It is expected to be fully operational in April, executives at Retirement Clearinghouse said.
Will the new network help people with larger account balances move their savings to new jobs?
Maybe, but not right away. There’s less urgency to automatically move accounts with larger balances, administrators said, because workers can leave the balance at their former employer and take time to weigh their options. Plus, people with hefty balances tend to be more engaged in managing their accounts and less daunted by the often cumbersome process of filling out forms and making phone calls to move their savings.
Eventually, the network could expand to benefit all savers who want to move their accounts to new employers, said Spencer Williams, founder and chief executive of Retirement Clearinghouse. He acknowledged that moving balances could be “a royal pain.” A study by the company and Boston Research Technologies of 5,000 retirement-plan participants found that most people saw it as time consuming, generally taking weeks or months to transfer funds, and that about two-thirds needed help to finish the task.
Will I be able to opt out of an automatic transfer to a new employer?
Yes. The automatic transfer will be the default option offered to employees with small balances when they change jobs, Mr. Long of Alight said, but they can decline to participate if they want.