401(k) Savings at Risk: How Recent Legislation and New Partnerships Are Helping to Preserve Retirement Savings

Chicago, IL – Recent research shows that nearly 40% of workers who leave a job cash out their 401(k) plans each year, resulting in significant financial losses. This trend especially affects job switchers with small accounts, who often choose to cash out their accounts rather than rolling them over. As a result, they forfeit their savings and potential future earnings on that money. According to the Employee Benefit Research Institute, such “leakages” amounted to $92.4 billion in 2015.

The issue of cashing out 401(k) accounts is primarily attributed to the ease of taking a check compared to the multistep process of moving the money to a new 401(k) plan or an individual retirement account. This “friction” leads to significant losses in the 401(k) ecosystem, estimated to be nearly $2 trillion over a 40-year period. However, recent legislation, such as Secure 2.0, and partnerships among some of the nation’s largest 401(k) administrators are working to reduce this friction and address existing leaks.

U.S. policy includes mechanisms to keep money in the tax-preferred retirement system by imposing penalties on early withdrawals and limiting access to 401(k) savings before retirement. However, job changes remain a concern, as workers can opt for a check or other options when leaving a job. This has led to the average baby boomer changing jobs about 13 times from ages 18 to 56, with many individuals cashing out their entire 401(k) balance.

Employers also have the legal authority to cash out small account balances of former employees who leave their 401(k) accounts behind, further contributing to the issue of leakage. In response, legislation such as Secure 2.0 and initiatives like “auto portability” are being implemented to combat this problem and preserve more money in the retirement system.

One of the major challenges is the imperfect solution of rolling funds to an IRA, as these assets are typically held in cash-like investments with minimal interest and fees. To address this, large administrators of 401(k)-type plans have implemented an “auto portability” initiative to automatically transfer small balances to new employers, unless workers elect otherwise. This approach aims to leverage workers’ tendency toward inaction in preserving their retirement savings.

Additionally, recent legislation has directed the U.S. Labor Department to create a “lost and found” for old, forgotten retirement accounts, which will help workers locate plan benefits they may be owed and identify who to contact to access them. This is seen as a significant step forward in addressing the issue of lost retirement accounts. With these initiatives in place, the aim is to reconnect millions of people with the 401(k) accounts they left behind, ultimately benefitting both workers and retirement system administrators alike.