Nathan Place | Financial Planning

May 12, 2023

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

That solution is a plan feature called auto-portability. The concept is simple: When a worker changes jobs, the balance in their old retirement account is transferred automatically to the new one. The employee is notified and given an option to opt out, but if they want their savings all in one place, they don’t have to do anything — the rollover happens by default.

“What it means is when you’re leaving from one company to the other, you don’t have to take any action,” said Yanwen Wang, chair of the marketing and behavioral science division at the UBC Sauder School of Business. “All of your money will be automatically transferred from Company A to Company B.”

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

One reason is it’s so new. The fintech services company Retirement Clearhouse only came up with the idea about a decade ago, submitting its proposal to the Department of Labor in 2014. So far, only five retirement plan providers have started using auto-portability: Fidelity, TIAA, Alight, Empower and Vanguard.

“Right now those are a relatively small network,” Wang said. “I think more things have to be done at this stage, like trying to involve more financial service providers. … That’s something that I think needs the joint effort of employers as well as plan providers.”

In this era of high job turnover, rollovers are crucial to building retirement savings. The average 401(k) participant has 9.9 employers over the course of his or her career, according to the Employee Benefit Research Institute. That means every year, 14.8 million Americans with workplace retirement plans move on to new jobs.

Unfortunately, their savings often don’t travel with them. Almost half of U.S. workers — 41.4% — withdraw money from their 401(k)s when they change jobs, according to a recent study by the UBC Sauder School of Business. Of those who do this, 85% cash out the whole account.

Even by doing nothing, workers put their savings at risk. Job changers who neglect to roll over their savings often leave behind a trail of forgotten retirement plans, which become harder to access over time. The research firm Capitalize has estimated that there are approximately 24.3 million of these “lost” 401(k)s in the United States, holding about $1.35 trillion in assets.

“As American workers are very mobile and are moving around from employer to employer, they’re leaving behind balances in 401(k) plans,” said Dave Stinnett, head of strategic retirement consulting at Vanguard. “It’s important that those balances find a way to follow the worker and get consolidated.”

Research has found that auto-portability helps a great deal with that consolidation. A study by the Retirement Clearinghouse found that after introducing the feature at a major 401(k) sponsor, the plan’s cash-out leakage plunged from 48.5% to 27.2%. A separate study by the Employee Benefit Research Institute found that over 40 years, full adoption of auto-portability across the country would save Americans almost $2 trillion.

“It’s a no-brainer,” said Steve Holman, head of the Institutional Investor Group at Vanguard. “It’s beneficial to everyone. From a plan sponsor’s perspective, it reduces administrative burdens. From a participant’s perspective, it keeps their money in the plan.”

How can auto-portability reach more 401(k)s? 

One way could be through legislation. Last year, the retirement law SECURE 2.0 gave a major assist to auto-enrollment, the practice of automatically enrolling workers in their retirement plans. The legislation required that…READ MORE