Automatic 401(k) Transfers Would Boost Workers' Savings
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What is the main topic discussed in this episode?
Here's your money briefing for Wednesday, July 15th. I'm J.R. Whalen for The Wall Street Journal. Many of the workers who lost their jobs in the pandemic are looking for work elsewhere. In the meantime, those with 401k retirement savings might be tempted to cash out instead of rolling them over to the next job. But that comes at a steep cost.
You know, a lot of people, especially if they're younger and maybe they have some pressing need, they see that money there. They think, OK, I'll have to pay the taxes and maybe in some cases, often a penalty, 10% penalty. But they think, well, you know, this is a good way to get out of whatever financial bind that I'm in.
Cashing out early, either because you need the money or because rolling over 401k funds seems too complicated, also can cost you savings growth long term.
Why are workers cashing out 401(k) balances when they change jobs?
In a moment, our retirement reporter Ann Tergesen will be here to explain services that make transferring 401k between jobs easy. That's after the break.
Young workers today move from job to job a lot more often than previous generations. And when they do, instead of bringing their 401k savings with them, they're taking the cash. But soon some employers will start offering services that automatically transfer workers' 401k money between jobs. Our retirement reporter Ann Tergesen is here with me to explain how they work. So Ann, is the need for this kind of service more pronounced than people might think? And what I mean by that is, Younger workers today tend to change jobs frequently. We currently have millions looking for new jobs as well.
How do current 401(k) rules treat small account balances when employees leave?
Yeah, well, I think ever since we've had 401k plans, there's been a need for this kind of thing because, I mean, American workers do move around and, you know, they start 401k plans and in some cases they move after two or three years. They really don't have a lot accumulated. Maybe they leave the account behind and they forget about it. And that can be a problem.
Now, how does the service work between an employee and their employer?
Basically, in order to have access to this service, an employee has to have an employer who signs up for it. And the record keeper who's administering the plan has to make it available. So that's sort of the first step. So the record keeper has to offer it and the employer has to offer it. But if that's the case, then the employee actually would have automatic access to this.
What is an automatic 401(k) transfer service and how does it work?
Now, what makes this service so revolutionary?
Right now, what happens is that if you have a 401k plan and you leave your job, whether you voluntarily leave the job or you're laid off, you have to decide what to do with that money. If you have $5,000 or less, your employer actually could force you to take the money out of the account. Either they might send you a check if you have very little money in the account, effectively cashing you out, or they might actually roll that money over to an IRA. When that happens, it can be hard for people to keep track of this money. A lot of people, especially when they're automatically enrolled in 401ks, they're not even really thinking about the money that's going into the plan. A lot of people may not even be completely aware that they are saving in a plan.
So if they leave a company after, say, two years and they have only a couple thousand dollars in the account, they may just like forget about that money.
Who needs to opt in for automatic transfers and when will they become available?
And, you know, over time it can grow and it can be an important source of income in retirement. Under current law, if you have less than $1,000 in your 401k account, your employer can basically send you a check for that money. I mean, they can basically kick you out of the 401k. And then when you get the check, A lot of people, the temptation is to cash it, which means that you're effectively cashing out your retirement savings. Of course, you could deposit that check into an IRA and effectively roll it over, but that's up to you. A lot of people just cash it out. If you have between $1,000 and $5,000 in the account, the employer can either basically let you stay in the 401k or they can say, you know what, we don't really want these small accounts in our 401k.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:05–0:50
2
Why are workers cashing out 401(k) balances when they change jobs?
0:50–1:37
3
How do current 401(k) rules treat small account balances when employees leave?
1:37–2:24
4
What is an automatic 401(k) transfer service and how does it work?
2:24–3:19
5
Who needs to opt in for automatic transfers and when will they become available?
3:19–4:06
6
How could automatic transfers reduce cash-outs during economic downturns?
4:06–5:01
7
Can automatic 401(k) transfers help close the retirement savings gap?
5:01–7:01
8
Which worker groups would benefit most from automatic rollover services?
7:01–8:20
Speakers
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