Why it's easier now to help job-changing Americans hang on to their savings

Tucked inside its quarterly report on the status of retirement savings accounts, Fidelity Investments mentioned its success to date with its automatic rollover service that employees can tap to transfer tiny retirement savings from one employer to the next.

More than 9,200 Fidelity 401(k) plans have adopted auto portability, an automatic rollover service launched three years ago for employees transferring small retirement savings from one employer to another. That's up from roughly 6,000 plans a year ago.

This is a big deal because droves of workers lose track of their retirement savings when they change employers, or they opt to cash out and swallow the taxes and potential penalties.

Fidelity is one of the founders of the Portability Services Network (PSN), a collaboration with Alight Solutions, Empower, TIAA, Vanguard, and the Retirement Clearinghouse, a nationwide digital exchange that automates the process for their sponsor clients and participants to move 401(k), 401(a), 403(b), and 457 account balances from plan to plan when employees change jobs.

Overall, PSN has signed up over 21,000 plans to offer auto portability, representing more than 5.6 million participants.

Discouraging cash-outs

This has the potential to be a game changer for retirement savers.

"Our data shows that over 40% of job changers with small balances cash out their workplace retirement account when they change jobs,” Katie Hutchinson, Fidelity's vice president of defined contribution product platforms, told Yahoo Finance.

One in three workers cash out their retirement accounts when leaving jobs, according to research provided by the Women's Institute for a Secure Retirement (WISER). For workers between the ages of 20 and 30, that pops up to 41% or higher, WISER president and founder Cindy Hounsell told Yahoo Finance.

This practice needs to go big — and a provision in a law signed at the end of 2002 is slowly providing that oomph. The legislation paved the way for employer retirement plans to provide automatic portability services.

The cost of cashing out

Pulling money out of a tax-deferred retirement fund before age 59½ is costly. The IRS levies a 10% penalty on distributions taken before the account holder is 59½. And income taxes are due on the funds that are withdrawn. Ultimately, you lose out on the compounding effects you'd get if the balance remained untouched.

Read more: 401(k) vs. IRA: The differences and how to choose which is right for you

Former employers generally transfer left-behind 401(k) money into individual retirement accounts (IRAs), and the cash sits in low-interest money-market accounts. These involuntary rollovers are fair game if an employee's 401(k) balance is between $1,000 and $7,000, but the employee has to be notified in advance.

Unfortunately, these warnings are often ignored.

Three years after an involuntary rollover, more than three-quarters of savers still have their money in the account their former employer established, according to Employee Benefit Research Institute data.

For balances below $1,000, your former employer will generally cut you a check. If your balance tops $7,000, it can remain in a former employer's 401(k) plan until you decide to either roll it over to your own self-directed IRA and choose how to invest it or transfer it to a new employer plan, if eligible.

Have a question about retirement? Personal finances? Anything career-related? Click here to drop Kerry Hannon a note.

How it works

Fidelity auto portability, for example, costs a one-time tiered fee of no more than $30 to the participant to transfer an account. The process is only available for eligible retirement accounts with a vested pretax balance of $7,000 or less — and both the old and new plans must have adopted the auto-portability service.

(If you're curious about how much cashing out even a small account can ultimately cost you, run the numbers in the Retirement Clearinghouse’s Cash Out Calculator.)

For example, if you're 30 and have $5,000 in an employer-provided retirement plan and cash out, you would pay $1,500 in taxes and penalties and have $3,500 left in your pocket. If that account stayed invested at a 5% annual rate of return until you turn 65 and opt to retire, it could be worth $27,580 if you rolled it over.

"If a small account is moved to a new employer plan, the assets are much more likely to be invested for the long term, and the account would continue to be receiving contributions,” Craig Copeland, director of wealth benefits research at EBRI, told Yahoo Finance. "As a consequence, someone is more likely to be engaged with an account, so not forgotten, and keeping the money together can provide real benefits to retirement savers."

Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including "Retirement Bites: A Gen X Guide to Securing Your Financial Future," "In Control at 50+: How to Succeed in the New World of Work," and "Never Too Old to Get Rich." Follow her on Bluesky.

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