Changing jobs can make it difficult for workers to keep track of their old 401(k) retirement savings. Some employers automatically cash out retirement accounts with balances below $1,000 and send the money to former employees through a cheque.
For balances between $1,000 and $7,000, many employers move the money into an Individual Retirement Account (IRA) if workers do not take action themselves.
A new system backed by major retirement account companies aims to make it easier for workers to carry their retirement savings from one employer to another. New research from Vanguard">New research from Vanguard shows that the system has helped reduce the number of workers withdrawing their retirement savings when they leave a job. However, most of the money has not yet reached workers' new employer retirement plans.
New system reduces the number of workers cashing out retirement savings
The share of workers with less than $1,000 in their 401(k) who cashed out their savings within 10 months of leaving a job fell to around 9%, from approximately 50%, after their employers joined the new system. Among workers with retirement savings between $1,000 and $7,000, the cash-out rate dropped to 31% from 39%.
{{/usCountry}}The share of workers with less than $1,000 in their 401(k) who cashed out their savings within 10 months of leaving a job fell to around 9%, from approximately 50%, after their employers joined the new system. Among workers with retirement savings between $1,000 and $7,000, the cash-out rate dropped to 31% from 39%.
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The findings come from research conducted by Vanguard, one of the companies involved in the new retirement savings system. The research examined workers from 83 employer-sponsored retirement plans managed by Vanguard that had adopted automatic portability.
What is the Portability Services Network and how does it work?
The Portability Services Network (PSN) is a group of major 401(k) administrators working together to help workers move their small retirement savings when they change employers. The network includes major retirement account companies such as Vanguard, Fidelity Investments and Alight Solutions. It also works with Retirement Clearinghouse.
The system has been operating since November 2023. Under this system, when a worker leaves a participating employer with a small 401(k) balance, the money is generally moved automatically into a safe harbor IRA. The money stays in this temporary IRA until the network identifies the worker's new employer retirement plan.
Once the system finds a matching 401(k) account, the money is automatically transferred from the temporary IRA into the new employer's retirement plan. This process is designed to help workers keep their retirement savings together without having to manage every transfer themselves.
However, there is one major condition: the worker's new employer must also participate in the network for the automatic transfer to happen. If the new employer is not part of the network, the money generally remains in the temporary IRA until a matching participating employer plan is found.
Only 6% of transferred accounts have reached new employer plans
Despite reducing cash-outs, the system has struggled to move retirement savings into workers' new employer plans. According to Vanguard's research, only 6% of accounts transferred into IRAs through the automatic portability network had successfully reached a new employer's retirement plan as of early 2026.
This is largely because only a limited number of employers have joined the network. Most of the remaining accounts were still sitting in temporary IRAs, waiting for the system to find a new employer plan that participates in the network. This means the system has been more successful in preventing workers from cashing out their savings than in moving the money into their next workplace retirement accounts.
Cashing out a 401(k) can lead to taxes and financial losses
Workers leaving a job generally have different options for handling their old 401(k) savings. If the account has more than $7,000, workers can typically leave the money in their former employer's retirement plan.
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If the balance is below $1,000, employers usually cash out the account and send the worker a cheque. For balances between $1,000 and $7,000, most plans transfer the money into an IRA if the former employee does not take action.
However, withdrawing retirement savings in cash can create an immediate tax burden. Workers who cash out their 401(k) savings may have to pay income tax on the withdrawn amount. Those younger than 59½ may also face an additional 10% early withdrawal penalty.
Apart from taxes and penalties, workers also lose the opportunity to earn returns on that money over the years. Keeping retirement savings invested allows the money to potentially grow over time through investment earnings and compounding.
Holman said 23,787 retirement plans have adopted automatic portability. These plans represent approximately 7.73 million participants. However, the overall number of participants in 401(k) and similar workplace retirement plans is estimated at around 96 million, Holman said, according to a CNBC report.
Holman also said around 1.22 million eligible participants were waiting to be matched with a new employer retirement plan. This number has increased by more than 25% since the beginning of 2026. The growing number of unmatched accounts highlights the challenge of getting more employers to participate in the system.
Fees in temporary IRAs could slowly reduce small retirement savings
Temporary IRAs may charge account management fees while the money waits to be transferred into a new employer's retirement plan. These charges can gradually reduce the value of small retirement accounts. The problem can become worse when the money is kept in an interest-bearing cash account or another conservative investment that earns limited returns.
Vanguard warned that earnings from conservative default investments may not be enough to cover the regular account fees. As a result, retirement savings could gradually lose value while workers wait for their accounts to be matched with a participating employer plan. This means that although automatic portability can prevent immediate cash-outs, it does not completely protect workers from the risk of losing money through fees.