February 23, 2024

401(k) rollovers are a major obstacle to retirement savings. Whether workers forget to transfer their savings or cash it out voluntarily, botched rollovers cost Americans billions of dollars every year. But experts say a solution to the problem already exists — it just hasn’t quite caught on yet.

The solution is a planned feature called automatic portability. The concept is simple: When a worker changes jobs, the balance in their old retirement account is automatically transferred to the new account. Employees are notified and can opt out, but if they want all their savings in one place, they don’t need to do anything – rollover happens by default.

“This means that when you jump from one company to another, you don’t have to take any action,” said Yanwen Wang, chair of the marketing and behavioral sciences department at UBC Sauder School of Business. “All your money goes from Company A to Company B automatically.”

So why hasn’t car portability solved America’s rollover problem?

One of the reasons is that it is so new.FinTech Services Company retirement clearinghouse The idea was only proposed about ten years ago, submit a proposal In 2014 to the Department of Labor. so far, Only five retirement plan providers Car portability has started: Fidelity, TIAA, Alight, Empower, and Vanguard.

“Right now these are relatively small networks,” Wang said. “I think more has to be done at this stage, like trying to get more financial service providers on board … I think it’s a joint effort between employers and scheme providers.”

In this age of high job turnover, rolling over is critical to building retirement savings.401(k) plan participants have an average of 9.9 employers during their career Institute for Employee Benefits. This means that 14.8 million Americans with workplace retirement plans move to new jobs each year.

Unfortunately, their savings often don’t go with them. Almost half of U.S. workers — 41.4 percent — withdraw money from their 401(k) plan when they change jobs, according to a recent study UBC Sauder School of Business. Of those who did, 85% cashed out their entire account.

Even if they do nothing, workers are putting their savings at risk. Job changers who neglect rolling savings often leave behind a litany of forgotten retirement plans that become increasingly difficult to access over time.research company capitalized estimate There are approximately 24.3 million of these “lost” 401(k)s in the US, holding approximately $1.35 trillion in assets.

Dave Stinnett, director of strategic retirement consulting at Vanguard, said: “Because American workers are highly mobile and often jump from one employer to another, they stay behind in their 401(k) plans. balances.” “It’s important that these balances find a way to follow workers and get consolidated.”

The study found that automatic portability helped a lot with this integration. A Retirement Clearinghouse Research found that after a major 401(k) sponsor introduced the feature, the plan’s cash churn rate plummeted from 48.5% to 27.2%. A study alone The Employee Benefit Research Institute found that nationwide adoption of car portability across the country would save Americans nearly $2 trillion over 40 years.

“It’s a no-brainer,” said Steve Holman, head of Vanguard’s Institutional Investors Group. “It’s good for everyone. From the plan sponsor’s perspective, it reduces the administrative burden. From the participant’s perspective, it keeps their money in the plan.”

How can car portability reach more 401(k) plans?

One way is through legislation.Last year, retirement law Security 2.0 Provides significant assistance to auto-enrollment, the practice of auto-enrolling workers in retirement plans. Legislation requires automatic enrollment in all newly created 401(k) and 403(b) plans beginning in 2025.

SECURE 2.0 doesn’t go very far with automatic portability — while it allows it, it doesn’t require it in any plans.but The next round of retirement reform Might go further.

Another way forward, as Holman points out, is for more employers and plan providers to come forward.

“The focus is shifting from gaining legislative recognition to now driving awareness and adoption across the industry,” Holman said. “We are actively planning sponsors to encourage adoption of this service.”

Some financial advisors would welcome this wider adoption.Stephen Maggard, Certified Financial Planner, USA Abacus Planning Group In Columbia, S.C., he said he recently worked with a client trying to combine three separate 401(k) plans.

“Rollovers are a real headache, and anything that can simplify the process is a step in the right direction,” Maggard said.

Jen Grant, CFP Perryman Financial Consulting In Dallas, she said she recently helped a client track down a series of older 401(k) plans. One dated back to the early 1980s and contained about $40,000 worth of company stock at the time. Today it’s worth $400,000.

“Losing your 401(k) is definitely a problem,” Grant said. “Clients change jobs frequently, especially early in their careers. They may move houses and addresses frequently, making it difficult for retirement plans to track them.”

As a solution, Grant said auto-flipping “makes a lot of sense.”

“As financial professionals, we encourage people to save for retirement,” she said. “We should also advocate for easier ways to keep up with this money, such as automatic carry.”