401(k) cash outs decline after automatic rollover: Vanguard study

If you leave your job, it can be difficult to maintain a small 401(k). Some employer plans allow you to cash out accounts with less than $1,000 or transfer slightly larger balances to an IRA. While taking your money in cash and moving on may seem like the easiest option, it can have short- and long-term financial implications.

The main 401(k) administrator-backed system aims to make it easier for employees to get their next job with their savings. New research from one such company, Vanguard, shows that even though most of the funds have not yet reached employees’ new retirement plans, they are contributing to the decline in the number of people accessing cash.

Vanguard research found that among workers with less than $1,000 in their 401(k), the percentage of workers who cashed out their 401(k) within 10 months of leaving the job dropped from about 50% to about 9% after their employers began participating in a new system called the Portability Services Network. Among people with balances between $1,000 and $7,000, the percentage of people converting their stocks into cash fell from 39% to 31%.

The Portability Services Network is a coalition of large 401(k) administrators including Vanguard, Fidelity Investments, and Alight Solutions, among others, and has been in operation since late 2023 in conjunction with the Retirement Clearinghouse.

How it works: When a worker with a low 401(k) balance leaves an employer that participates in a network, that money is typically automatically deposited into a Safe Harbor IRA and remains there until the network matches the balance with the worker’s new employer’s plan. The balance will then roll from that interim IRA into your new 401(k). The problem, however, is that the receiving employer must also join the network in order to transfer the funds to the next employer’s plan.

According to Vanguard research, only 6% of accounts transferred to IRAs as part of this automatic portability network were able to transfer to a new employer’s plan as of early 2026. This is largely because very few employers opted in. The remainder typically remains in the interim IRA, awaiting matching with another participating employer plan. Workers can always roll over money into a new 401(k) on their own, but the point of the network is that it happens automatically.

An analysis of approximately 220,000 outbound rollovers involving Vanguard participants found that the median balance was just $200, and nearly three-quarters were less than $1,000. The typical saver affected was 31 years old, had an annual income of about $20,000, and had worked for an employer for about six months, according to the study.

The cash-out analysis is based on employees in 83 employer-sponsored retirement plans managed by Vanguard that have automatic portability.

Typically, when you part ways with your employer, you can leave money in their 401(k) plan as long as the account value exceeds $7,000. Typically, if your balance is less than $1,000, your plan will be cashed out and a check will be mailed to you. For amounts between $1,000 and $7,000, most plans will roll the balance over to an IRA if the former employee does not take steps to move the balance himself.

Cashing out a 401(k) during retirement, whether done by the employer or the employee, can have a lasting financial impact. Workers who withdraw their savings are liable to pay income tax on the money, and if they are under age 59 1/2, they may be subject to a 10% early withdrawal penalty. You also lose the opportunity for that money to grow over time.

Most workers (84%) have changed employers at least once during their career, while 53% have changed jobs three or more times and 27% have changed jobs at least five times, according to new research from Empower, a 401(k) recordkeeper and founding partner of the Portability Network. This report is based on an online survey of 2,005 adults.

Additionally, the survey found that 50% of Gen Z respondents and 45% of Millennials said they had retirement savings from a previous employer but may have forgotten about it. This compares to 30% of Gen Xers and 14% of baby boomers.

Since the launch of the Portability Services Network in November 2023, there have been 53,118 completed transactions and a total of $71.3 million in assets transferred from a previous employer plan to a new employer plan via automatic portability, according to Steve Holman, senior vice president of strategic development for the Portability Services Network at Retirement Clearinghouse.

There are 23,787 plans with automatic portability, representing 7.73 million participants, Holman said. Overall, the number of participants in 401(k) and similar workplace plans is estimated to be about 96 million, he said.

There are 1.22 million eligible participants waiting to be matched with a new employer, an increase of more than 25% since the beginning of 2026, Holman said.

By keeping funds in a safe place, an IRA can be financially advantageous for investors rather than cashing them out. However, management fees can be burdensome on small balances, especially if the funds are in interest-bearing cash accounts or other conservative investments.

“For many of these small accounts, the returns from conservative default investments may not be sufficient to offset periodic account-level fees while the accounts remain unmatched, leaving balances vulnerable to gradual erosion,” the Vanguard study said.

Workers with Roth savings face another complication. If your retirement savings are in a traditional 401(k) (funded with pre-tax contributions and taxed when withdrawn in retirement), it goes into a traditional IRA. Similarly, a Roth 401(k) that is funded with after-tax contributions and withdrawn tax-free in the future will roll into a Roth IRA.

However, IRS rules do not allow you to roll your Roth IRA into your new employer’s 401(k), even if it is a Roth 401(k).

“We’re advocating for future legislation that would allow Rosdol to be covered by car carriers. Our technology can support that today,” Holman said.