On Wednesday, Fidelity Investments and Vanguard unveiled a unique partnership to ensure that 401(k) and other retirement assets remain in the hands of their respective clients despite job changes.
To streamline the process of transferring millions of 401(k) balances under $5,000 when employees shift employment, the two retirement behemoths and benefits administrator Alight Solutions formed a jointly owned consortium. According to the Employee Benefit Research Institute, cash-outs account for an annual projected $92 billion in lost retirement savings (EBRI).
Having retirement plans follow employees wherever they go has been discussed for years, but it would take a large population for this to have any real impact. Auto-portability, if extensively implemented, is projected to increase retirement savings by $1.5 trillion over 40 years, with additional savings of $619 billion for employees of color and $365 billion for women, according to the estimates of the Employee Benefit Research Institute.
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As people change professions more frequently, the cash-out issue will only worsen. According to Alison Borland, executive vice president of Wealth Solutions at Alight, the initiative “is supposed to be a low-cost approach to safeguard savings for people who need it most,” meaning workers with less than $5,000 saved are typically lower-income, women, and minorities.
When the employee’s balance is less than $1,000, the company may cash out the account and provide a cheque directly to the employee. If the worker is under the age of 59 12, they will be subject to income tax and a 10% penalty on the amount that isn’t rolled over into a new 401(k) plan or individual retirement account (IRA) within 60 days.
A 401(k) balance of less than $5,000 can be rolled over to an individual retirement account (IRA), a practice that has come under fire because fees on money market funds can eat away at even the smallest balances.
The Retirement Clearinghouse, the creators of an auto-portability service, will serve as the central database for finding and matching workers. Transfers of less than $50 will be free, and the maximum cost paid to participants will be $30.
Fidelity Investments’ Workplace Investing Division President Kevin Barry said, “We are very consciously establishing the pricing at the lowest possible cost, and any excess of operational needs we want to invest back towards future price decreases.” Keeping records for these people is not a money-making venture, as such is not the case here.
The program helps businesses streamline the time-consuming process of rolling over 401(k)s and servicing the accounts of former employees with small balances.
According to John James, managing director and head of Vanguard Institutional Investor Group, “workers should not have to move mountains to relocate their retirement assets to a new workplace.” At the beginning of the year, Vanguard made public its intention to begin using the service.
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