Auto 401(k) Rollovers Cut Cash-Outs but Accounts Stall in IRAs
An automatic portability program is reducing 401(k) cash-outs among workers with small balances, though most accounts remain parked in temporary IRAs.
Workers with small 401(k) balances are less likely to cash out their retirement savings when automatic portability programs are in place, according to new research — but the findings come with a significant caveat: the vast majority of those accounts are not making it to employees' new employer-sponsored plans.
Automatic portability is designed to keep retirement assets invested by moving a departing worker's 401(k) balance seamlessly to their next employer's plan, sidestepping the tax penalties and lost compounding that come with early cash-outs. The research indicates the program is succeeding on the cash-out front, a notable win for workers who might otherwise deplete modest savings during job transitions.
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However, most accounts in the program are landing in temporary individual retirement accounts rather than completing the full journey to a new employer plan. That gap suggests the infrastructure connecting workplace plans may still be too fragmented to deliver on the program's broader promise of continuous retirement savings accumulation.
The findings carry particular weight for lower-income workers, who disproportionately hold smaller balances and face the greatest temptation to cash out between jobs. Keeping those funds invested — even in a holding IRA — represents a meaningful improvement over liquidation, but policymakers and plan administrators may need to address the bottleneck preventing full portability from being realized at scale.
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