Two top 401(k) companies — Fidelity Investments and Vanguard — have teamed up with two information technology and services companies — Alight Solutions and Retirement Clearinghouse — to create an auto-portability network. If auto-portability gets adopted nationwide, these companies say that it can help Americans preserve $1.5 trillion in additional retirement savings. Let’s break down what this collaboration means, how auto-portability works and what you can do to avoid losing retirement money when you change jobs.
If you need help with a 401(k) plan after switching jobs, a financial advisor can walk you through different options.
Fidelity Investments, Vanguard, Alight Solutions and Retirement Clearinghouse are creating an auto-portability network to help workers avoid losing money in taxes and penalties when they cash out small retirement account balances after switching jobs.
The network will automate the process of moving account balances from old defined contribution plans to new ones. These include 401(k)s, 401(a)s, 403(b)s and 457s.
The press release announcing the auto-portability network in October says that this automated process focuses on account balances under $5,000; and if auto-portability gets adopted nationwide, it can help Americans preserve $1.5 trillion in additional retirement savings over 40 years.
“The need for auto portability has been driven by the lack of seamless plan-to-plan savings portability amid a highly mobile workforce,” the press release said. “Workers with less than $5,000—the focus of the auto portability service—cash out at the time of their job change at much higher rates than all job-changing workers.”
For reference, an auto-portability bill proposed by U.S. Senators in 2022 estimated that employees cash out $105 billion each year when changing jobs.
The stated goal of the auto-portability network is “to help America’s under-served and under-saved workers improve their retirement outcomes.”
A related infographic from Retirement Clearinghouse, reiterates that keeping money in a retirement plan can pay off big: A worker at age 25 preserving $5,000 in retirement savings can see it grow by 14 times to $70,000.
The press release says that the auto-portability network currently represents almost 44 million workers in more than 48,000 employer-sponsored retirement plans.
What Should You Do With Your Old 401(K)?
If you have changed your job, or are planning to do so in the near future, you are not alone. Workers in 2022 told the Pew Research Center in a study that one in five “are very or somewhat likely to look for a new job in the next six months.”
For a bigger job market picture, the U.S. Bureau of Labor Statistics said that data from the Great Resignation — an ongoing job trend that started in early 2021 with employees quitting en masse — suggests that the resignation rate was even higher than the 1960s and 1970s.
Employees leaving a workplace can generally keep their 401(k) where it is, roll it over into another account with a new employer or transfer the money to an individual retirement account (IRA). But, as the auto-portability network press release points out, many workers with account balances under $5,000 tend to cash their 401(k)s out because the current transfer process can be complicated and time-consuming.
If you decide to cash out your old retirement plan, you should keep in mind that the IRS will treat the balance as taxable income, which means that you will have to pay income taxes on it. And as noted earlier by the Retirement Clearinghouse, a 25-year-old with $5,000 in retirement savings can see it grow to $70,000 over time.
For those with larger 401(k) accounts, keeping the money with a former employer can make sense if it includes company stock and other financial investments like stable value funds.
But leaving your 4o1(k) where it is, however, can also cost you $700,000 in a lifetime. So you should re-evaluate and rebalance regularly to make sure that higher fees and poor asset allocations aren’t eating into your savings.
As an alternative, rolling your money from an old 401(k) into an IRA can get you lower fees and more investment options. And transferring your 401(k) balance to another account with a new employer will also allow you to put all of your retirement money in one place.
In either case, when moving your retirement money, make sure that the terms in the new account are more favorable than the older ones. And, if you’re younger than age 59.5, follow the rollover rules to avoid an early withdrawal penalty.
Bottom Line
Fidelity Investments, Vanguard, Alight Solutions and Retirement Clearinghouse are creating an auto-portability network to help workers changing jobs avoid taxes and penalties from cashing out small retirement balances. Workers cashing out can face a 10% penalty (if under age 59.5), in addition to income taxes. You can boost your retirement savings instead by keeping your money in an old 401(k) or rolling it over to a new 401(k) or an IRA account. Make sure, though, to compare the terms and follow the rollover rules.
Tips for Retirement Planning
- A financial advisor can help you create a retirement plan based on your financial needs and goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much money you can get from Social Security, SmartAsset’s free calculator can help you get an estimate.
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