Efforts to keep workers from cashing out their 401(k)s gain steam

A provision in President Biden's new legislation aims to keep workers from cashing out their 401(k) when they move from one job to another, building on a similar effort launched last year by the private sector.

The legislation paves the way for employer retirement plans to provide automatic portability services, so funds can be transferred seamlessly into a new employer plan unless the worker opts out. It also increases the limit for automatic rollovers from $5,000 to $7,000. That follows a new consortium launched in October by leaders in the 401(k) retirement field with the goal of automating retirement plan rollovers.

Liquidating funds before a certain age is costly with penalties and taxes and can rob vulnerable workers the chance to generate meaningful savings for retirement. But some critics say the moves may be too narrow and don't fully address why people cash out early.

Discouraging cash-outs

Before the legislation was signed in December, a collaboration of Vanguard, Fidelity Investments, Alight Solutions, and the Retirement Clearinghouse created the Portability Services Network, a nationwide, digital exchange that will automate the process for their sponsor clients and their participants to move 401(k), 401(a), 403(b), and 457 account balances from plan to plan when employees change jobs.

The consortium — expected to go live by the end of March — currently represents around 43.8 million workers across more than 48,000 employer-sponsored retirement plans, based on data published by Pensions & Investments. This new law will help take that to a higher level.

"The legislation has a major, positive impact on the consortium and auto portability," Neal Ringquist, executive vice president at Retirement Clearinghouse, told Yahoo Finance. "This should increase the number of auto portability transactions by 20% when the new law takes effect, ultimately allowing the consortium to reduce the one-time auto portability transaction fee charged to the participant."