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The Problem: Cash‑Out Leakage and Lost Accounts
American workers now hold an average of more than 12 jobs over the course of their careers. During job changes, many end up cashing out small 401(k) balances and not rolling them into tax-qualified retirement plans. Industry studies estimate this trend may be causing an annual savings “leakage” of more than $90 billion due to taxes, penalties, and the missed growth and compounding potential of those cashed-out dollars. “Forgotten” 401(k) accounts may also be slipping through the cracks, further undermining employees’ long-term financial wellness.
Enter Auto Portability: Keeping Savings Connected to Their Owners
To address the issue, members of the retirement industry are supporting an option called “auto portability.” A consortium of major recordkeepers launched the Portability Services Network (PSN) to automatically reconnect small retirement account balances with their owners’ new employer plans when they change jobs.
The consortium’s intent is to have a process that is secure and easy for participants. Here’s how it works… If an employee leaves behind a 401(k) balance below a set level (typically $7,000), the network’s technology searches for that individual’s new employer plan and automatically rolls the old balance into the employee’s new plan account. Participants receive a notice and can opt out if they do not want the transfer. Otherwise, their savings automatically follow them to their next job. Participants pay a low, one-time fee (capped at around $30) when their account successfully transfers.
Plan sponsors should conduct thorough due diligence to understand the terms, conditions, and implications of activating this option for their plans.
Research estimates that if this new feature were adopted widely, it could preserve an extra $1.6 trillion in retirement savings over the next generation. By keeping those small accounts invested instead of being prematurely drained, even modest balances can grow over time and contribute to a more secure retirement.
Sources:
https://www.bls.gov/news.release/pdf/nlsoy.pdf
https://psn1.com/news/press-release-portability-services-network-jumpstarts-nationwide-adoption-of-auto-portability
https://rch1.com/auto-portability/frequently-asked-questions
https://rch1.com/blog/the-triple-crown-to-unlock-retirement-security-for-all
https://fcwpol.files.cmp.optimizely.com/download/302392d88afc11ef969f5ed37da10eba
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