A New Option for Transferring Retirement Funds When Changing Jobs Is About to be Offered

Three of the largest 401(k) administrators are making it simpler for employees with 401(k) accounts of less than $5,000 to move their funds to new workplace plans.

For millions of employees with modest balances, it will soon be easier to transfer retirement assets when transferring employment.

The modifications are intended to prevent what retirement analysts refer to as a “leakage” of money between 401(k)s and other workplace retirement plans.

Unlike employees with large retirement accounts, people with less than $5,000 often cannot leave assets in a prior employer’s plan when changing employment. (Some companies may permit it but are not required to, and the majority do not.) Employers that do not wish to manage many minor accounts force employees to withdraw the funds, either freely or against their will. Many do not reinvest the funds, so diminish their retirement savings.

According to a 2020 Employee Benefit Research Institute analysis, these “cash outs” can result in large gaps in retirement savings. According to research by Retirement Clearinghouse, a financial technology business, around one-third of 401(k) account holders had balances of less than $5,000 each year. The Employee Benefit Research Institute, the Labor Department, and industry sources indicate that approximately half of the low-balance workers, or approximately three million people per year, cash out in their first year after leaving a job and are taxed penalized for it.

For this reason, three major 401(k) providers -Vanguard, Fidelity Investments, and Alight Solutions – partnered with Retirement Clearinghouse to facilitate the transfer of workplace retirement accounts to a new employer and encourage employees to continue saving and investing.

The company established the Portability Services Network, which will serve as a center for finding an employee’s workplace retirement account and moving its balance to a new employer’s plan.

According to the consortium, minorities, women, and workers with low incomes, who have a higher rate of cash-outs when switching jobs, may benefit most from the automatic transfer option.

According to the network’s release, the employee is not required to take action. The network’s mission is to “assist America’s neglected and under-saved employees enhance their retirement outcomes.” (According to existing laws, the money must be temporarily deposited into an individual retirement account before being transferred to the new workplace plan, but the network will also manage this process, according to Greg Long, Alight’s director of public policy.)

Due to regulatory ambiguity, several retirement plan administrators were previously hesitant to offer so-called auto portability for modest amounts. The Secure Act 2.0, which Congress passed at the end of last year, codified the automated transfers and cleared up some misunderstandings, establishing, for example, that the network may charge for its services. (Retirement savers incur a one-time charge according to their account amount. According to officials, the limit is $30 and is anticipated to decrease as the network expands.)

Cerulli Associates, a consulting and research organization for the financial services sector, estimates that the three existing administrators had around half of the 401(k) market share in 2021. In addition, the portability network stated that up to three more administrators — or record keepers in industry parlance — may join as owners. In contrast, any number of administrators may join as participants. According to Kevin Barry, head of workplace investment at Fidelity, the network is in discussion with other administrators.

Steve Holman, Vanguard’s Institutional Investor Group principal, stated that it works best when we have widespread industry engagement.

Here are questions and answers about the transfer of retirement savings.

Why can’t I just leave my retirement savings with my previous employer?

When you leave a job with a 401(k) balance of more than $5,000, companies often allow you to leave the money where it is. (In accordance with Secure Act 2.0, the barrier will rise to $7,000 beginning the next year.)

Suppose your account balance falls below $5,000. In that case, your employer can drop you from the plan and, if you do not provide alternative instructions, deposit your assets into an individual retirement account in your name. These “safe harbor” I.R.A.s include low-risk, low-yielding funds, and their maintenance costs can erode account balances over time.

If your account balance is less than $1,000, your employer may cash out your account and send you a cheque.

Once a check is in hand, it is tempting to cash it, according to a certified financial adviser in Madison, Wisconsin, Matt Fizell. You normally have 60 days to reinvest the funds in your new workplace account to avoid paying taxes or a penalty. Contact your employer for more instructions.

Is the new portable network operational?

According to Retirement Clearinghouse executives, it is anticipated to be completely operational by April. 

Will the new network aid individuals with greater account balances in transferring their funds to new jobs?

Perhaps, but not immediately. Administrators stated that there is less rush to automatically transfer accounts with greater amounts since employees can leave the sum with their old company and consider alternatives. In addition, persons with large balances tend to be more interested in monitoring their accounts and less intimidated by the typically tedious process of filling out documents and making phone calls to transfer their assets.

Spencer Williams, founder and C.E.O. of Retirement Clearinghouse, stated that the network might eventually grow to help all savers who choose to transfer their accounts to other employment. He admitted that shifting balances might be a “major hassle.” Most of the 5,000 retirement-plan members surveyed by the business and Boston Research Technologies saw the transfer of money as time-consuming, lasting weeks or months on average, and required assistance.

Am I permitted to decline an automated transfer to a new employer?

Yes. Mr. Long of Alight stated that the automated transfer would be the default option for employees with minor balances who move employment, although they can opt-out if they so want.

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