Policy changes look to reduce 401(k) plan ‘leakage’

Trillions of dollars from the U.S. retirement system are lost every year due to leakage.

This occurs when workers take their savings out of the tax-preferred retirement system, often through 401(k) plan cashouts.

This issue particularly affects job switchers, who might drain their accounts rather than moving them to a new plan or IRA.

Recent legislation and partnerships aim to reduce these leakages.

Secure 2.0 and auto portability initiatives are designed to keep funds in the retirement system, potentially preserving trillions of dollars over time.

However, there are also efforts to help workers reconnect with forgotten retirement accounts through a “lost and found” initiative.

While employers were previously allowed to cash out small balances when employees left jobs, this practice was limited to accounts below $1,000.

Secure 2.0 raised this limit to $7,000.

Additionally, a coalition of large 401(k) administrators has come together to automatically roll over small balances into the employee’s new plan unless they opt out.

If 70% of the market is covered, auto portability is anticipated to reconnect about 3 million individuals annually with their forgotten 401(k) accounts.

This is particularly beneficial for young workers, low earners, and women, who are more likely to cash out and have smaller balances.