New research from Vanguard indicates that the automatic portability system for 401(k) accounts has significantly reduced cash-out rates for workers leaving their jobs. However, adoption by employers remains low, meaning only a small percentage of these accounts are successfully transferred to new employer plans.
The system aims to keep retirement savings intact by rolling small balances into IRAs, preventing immediate taxation and penalties. Despite its success in curbing cash-outs, the low participation rate among plan sponsors is a key hurdle to its widespread effectiveness.
Automatic 401(k) Rollovers Reduce Cash-Outs, Research Finds — But Few Accounts Reach New Employer Plans
Leaving a job can make a small 401(k) hard to hold on to. Some employers' plans automatically cash out accounts under $1,000 or move slightly larger balances into an IRA. Taking the money in cash can feel like the simplest option, but it can have significant short- and long-term financial consequences.
A system backed by major 401(k) administrators aims to make it easier for those savings to follow workers to their next job. New research from Vanguard indicates that this system is helping fewer people cash out their retirement funds. However, the study also reveals that most of this money has yet to reach workers' new retirement plans.
Key Findings from Vanguard Research
- For workers with less than $1,000 in their 401(k), the share who cashed out within 10 months of leaving their job fell to about 9% from roughly 50% after their employers adopted the Portability Services Network (PSN).
- Among those with balances between $1,000 and $7,000, the cash-out rate decreased to 31% from 39%.
- Despite the reduction in cash-outs, only 6% of accounts transferred through the PSN had reached workers' new employer plans as of early 2026. This low adoption rate is primarily due to limited participation by plan sponsors.
How the Portability Services Network Works
The Portability Services Network is a collaboration among leading 401(k) administrators, including Vanguard, Fidelity Investments, and Alight Solutions, in partnership with Retirement Clearinghouse. It has been operational since late 2023.
When a worker with a small 401(k) balance leaves an employer that participates in the network, their savings are typically automatically rolled into a safe harbor IRA. These funds remain in the IRA until the network facilitates a match with the worker's new employer plan. Subsequently, the balance is rolled into the new 401(k). A critical requirement for this seamless transfer is that the receiving employer must also be part of the network.
Low Adoption Hinders Full Portability
Vanguard's research analyzed approximately 220,000 outbound rollovers from its participants. The median balance involved was a mere $200, with nearly three-quarters of these accounts holding less than $1,000. The typical individual affected by these small balances was 31 years old, earned about $20,000 annually, and had been with their employer for approximately six months.
The analysis of cash-out rates is based on workers from 83 employer-sponsored retirement plans administered by Vanguard that have adopted automatic portability.
Financial Ramifications of Cashing Out
Typically, when an employee departs, balances exceeding $7,000 can remain in the former employer's 401(k) plan. Accounts under $1,000 are often automatically cashed out, while those between $1,000 and $7,000 are usually rolled into an IRA by default if the former employee takes no action.
Cashing out a 401(k) upon job separation, whether initiated by the employer or the employee, can lead to lasting financial repercussions. Withdrawn savings are subject to income taxes and potentially a 10% early withdrawal penalty for individuals under 59½. Crucially, these withdrawals forfeit the potential for long-term investment growth.
Job Mobility and Retirement Savings
Job mobility is a common aspect of modern careers. According to a study by Empower, a 401(k) recordkeeper and a founding partner of the portability network, 84% of workers have changed employers at least once, with 53% switching three or more times. This high turnover rate increases the likelihood of accumulating multiple small, disconnected retirement accounts.
The Empower survey also highlighted a significant concern about lost retirement savings: 50% of Gen Z and 45% of millennials reported potentially having retirement savings from previous employers that they've lost track of, compared to 30% of Gen X and 14% of baby boomers.
Progress and Potential of Automatic Portability
Since the PSN's inception in November 2023, there have been 53,118 completed transactions, amounting to $71.3 million in assets successfully transferred from previous employer plans to new ones via automatic portability, according to Steve Holman, senior vice president of PSN strategy and development at Retirement Clearinghouse.
Currently, 23,787 plans have adopted automatic portability, covering approximately 7.73 million participants. This represents a portion of the estimated 96 million individuals participating in 401(k)s and similar workplace plans in the U.S.
As of early 2026, there are 1.22 million eligible participants awaiting a match with a new employer plan, an increase of over 25% since the start of the year, according to Holman.
Challenges with Automatic Portability
While keeping money in a safe harbor IRA is financially advantageous compared to cashing out, potential management fees can erode small balances, particularly if the funds are held in conservative investments or cash accounts. The Vanguard study notes, "For many of these small accounts, earnings on the conservative default investment may not be sufficient to offset recurring account-level fees while the account remains unmatched, leaving the balance vulnerable to gradual erosion."
A further complication arises with Roth savings. If retirement funds are in a traditional 401(k) (funded with pre-tax contributions), they are rolled into a traditional IRA. Similarly, Roth 401(k)s (funded with after-tax contributions) are rolled into Roth IRAs.
However, current IRS regulations prohibit rolling Roth IRA funds into a new employer's 401(k), even if it's a Roth 401(k). Holman stated, "We are advocating for future legislation to allow for Roth dollars to be eligible for auto-portability — our technology can support it today."
