The 401(k) industry launches rollover plan for old retirement

On Oct 6, 2022

JGI | Jamie Grill | Blend Images | Getty

401(k) plans hold a whopping $7.7 trillion in retirement savings. But cash-outs of small accounts pull billions from the system each year and can harm investors’ chances of a secure retirement, research shows.

A trio of the industry’s largest 401(k) administrators — Fidelity Investments, Vanguard Group and Alight Solutions — have teamed up to change that.

Along with Retirement Clearinghouse, they created a consortium — Portability Services Network, LLC — to automatically reconnect workers with old 401(k) accounts they may have lost or left behind after leaving a job.

The partnership, which the companies call a first of its kind for the industry, is meant to address what they see as a structural flaw in the current retirement system.

If workers leave behind 401(k) accounts with less than $1,000, current rules let employers cash out the funds and issue a check. That cash-out may come with taxes and penalties if you don’t move the funds to a new qualified retirement plan within a short window.

Employers generally can’t cash out accounts of $1,000 or larger. But they can shift those with $1,000 to $5,000 out of a 401(k) and into an individual retirement account, where — unless the employee takes action — funds are often invested by default in cash on their behalf, a strategy inconsistent with building a nest egg over decades, experts said

Employee- and employer-initiated cash-outs are a “serious problem” that led $92.4 billion to flow out of 401(k) plans in 2015, according to most recent data from the Employee Benefit Research Institute.

Automatically reconnecting workers to accounts with less than $5,000 could add up to $1.5 trillion kept in the retirement system over 40 years, according to EBRI.

“Billions of dollars get left behind or is just cashed out, and [workers] pay taxes on it and spend it, which isn’t good for their long-term retirement savings,” said Philip Chao, a certified financial planner and founder of Experiential Wealth in Cabin John, Maryland.

Retirement Clearinghouse teams up with 401(k) recordkeepers for under-served retirement savers

How the new consortium will work

This is where the new consortium of plan administrators is focusing their efforts. When a worker changes jobs and has $5,000 or less in their account, Fidelity, Vanguard and Alight will automatically shift 401(k) assets to the employee’s new workplace plan when possible. Basically, the money will follow the worker.

The worker can choose to cash out at that time, though Dave Gray, head of workplace retirement platforms at Fidelity, expects more than 90% to keep the money invested.

And it’s not just 401(k) balances — the transfers will also apply to similar workplace plans outside the private sector, including 403(b), 401(a) and 457 plans. Women, minority and low-income savers stand to benefit most, since they disproportionately have…