New option for moving savings when switching jobs

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 one- 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 3 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 lowerincome 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 undersaved 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 socalled 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.

Q

Will I be able to opt out of an automatic transfer to a new employer?

A

Yes. The automatic transfer will be the default option offered to employees with small balances when they change jobs, Long of Alight said, but they can decline to participate if they want.