Fidelity, Vanguard Working To Prevent 401(k) Leaks

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The days of working for a single company for decades, getting a decadent retirement party and riding off into the sunset with a fat pension are over.

Today’s workforce is more remote, transient and fluid.

The average American holds 12 jobs during their career and spends an average of 4.1 years with a single employer.

That complicates things when it comes to retirement savings, especially if you’re opening a 401(k) account at each of your stops.

When you leave a company, you can no longer contribute to your 401(k) account. But the money is still yours. You can leave it there, roll it into your new company’s 401(k) (especially if the fees are cheaper) or even roll it into an IRA.

However, did you know that you may not have any of those options if your balance is less than $5,000?

If you’re carrying less than $1,000 in your account, your old company can sell your investments, send you a check and require that you quickly move the money into another qualified retirement account. Otherwise, you’ll pay taxes, including early withdrawal fees.

Holding between $1,000 and $5,000? Your former employer can move the money to an IRA and invest it in cash by default, crimping your long-term growth.

Think that’s not a big deal? Those rules led to $92.4 billion flowing out of 401(k) plans in 2015, according to the Employee Benefit Research Institute. Imagine that amount of money staying invested for decades and compounding over time.

New, Easier Way To Move Your Investments to Your New Job

With a goal of fixing this inefficiency, Fidelity, Vanguard, Alight Solutions, and Retirement Clearinghouse have just announced the formation of a company called Portability Services Network, LLC. Together, they represent about 40% of total investors in workplace retirement plans, according to CNBC.


If one of those institutions manages your 401(k), and you change companies with $5,000 or less in your account, they’ll move your investments into your new company’s plan.

In other words, instead of having your investments automatically cashed out — or put into cash in an IRA without you realizing it — your investments will follow you.

The Employee Benefit Research Institute also found that cashing out your 401(k) prior just once to retirement increases your chances of not having enough money for retirement by more than 30%.

Companies also increasingly auto-enroll new workers into 401(k) plans. Sometimes employees don’t even realize they’re enrolled and getting a 401(k) match. A relatively fast exit from a company can then lead to lost funds via an orphaned 401(k) account.

This new partnership can help prevent that from happening as well.

Workers pay a one-time 5% fee, capped at a maximum of $30, to use the new service. CNBC reports that the service intends to operate at break-even costs.

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