Fidelity, Vanguard team up to ease 401(k) portability when workers switch jobs

A new partnership between 401(k) administrators could preserve more than $1 trillion in retirement savings, helping tens of millions of workers in the U.S. keep more money in their 401(k) plans.

The three 401(k) administrators are Fidelity Investments, Vanguard, and Alight Solutions, which represent approximately 43.8 million workers across more than 48,000 employer-sponsored retirement plans, the three groups said in a statement. The new consortium will utilize Retirement Clearinghouse (RC),a service that provides account portability for retirement plans when workers change jobs.

“With this historic development, American workers who change employers can have their workplace retirement savings automatically move to their new retirement plans. Automating the process of moving 401(k), 401(a), 403(b), and 457 account balances from plan to plan when workers change jobs will help mitigate cash-out leakage and preserve trillions of dollars in savings in the U.S. retirement system, particularly benefiting minorities, women, and low-income workers,” the statement said.

Cashing out can mean losing out with retirement accounts

In an era when most Americans will have several employers throughout their working years, the lack of portability with their retirement funds has been a significant problem. The Employee Benefit Research Institute (EBRI) has estimated that approximately $92 billion in savings leaves U.S. retirement funds annually when workers who switch jobs cash out their retirement accounts—which results in taxes and penalties and doesn’t guarantee that money will be switched to a new retirement account.

And many workers simply leave funds sitting in old accounts—this analysis estimates that in 2021, Americans left nearly $1.35 trillion sitting in retirement accounts with previous employers, which usually means those accounts are not overseen by the employee and could be invested inappropriately. That study also found that leaving behind a forgotten 401(k) account has the potential to cost an individual almost $700,000 in foregone retirement savings over a lifetime.

Advantages of portability — and a need to expand the option

The new consortium is called Portability Services Network, LLC (PSN), which will utilize Retirement Clearinghouse, a digital hub for transferring retirement plan accounts. “PSN will act as a clearinghouse for automatically locating a participant’s active workplace retirement account in their current employer’s plan and transferring the same participant’s account from their prior employer’s plan into their active account,” the groups said.

The new system will be especially valuable to protecting savings of lower-income workers, the statement added. EBRI estimates that workers with less than $5,000 in their plans cash out at the time of their job change at much higher rates than other workers. Having a portability option will benefit groups that have traditionally worked at lower-paying jobs.

“EBRI estimates that if auto portability was broadly adopted, over the course of a 40-year period an additional $1.5 trillion in savings would be preserved in the U.S. retirement system. Auto portability will help 67 million Black and minority workers save $619 billion, [and] 42 million women workers of all ethnicities save $365 billion,” the groups’ statement said.

Although the new consortium represents some of the larger plan administrators of retirement accounts, it does not include all such groups, leaving out tens of millions of Americans. The PSN is designed to include up to three additional investment groups.

Some of those involved in this consortium have also supported legislation to require portability among retirement plans: the Advancing Portability Act of 2022 was introduced in the Senate last June and would require many of the features of the new industry group. The RCH has promoted the legislation, with RCH chair Robert L. Johnson releasing a statement in June praising the bill.

“I congratulate Senators Tim Scott and Sherrod Brown for leading this bipartisan push to build wealth for underrepresented American communities. Auto portability will help historically underserved and under-saved workers, especially Black Americans, realize greater benefits from the U.S. retirement system—and achieve the American dream of a financially secure retirement,” said Mr. Johnson. “Enshrining auto portability in law is a significant milestone in our national effort to bridge America’s wealth gap.”