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Leaving a job can make a small 401(k) hard to hold on to: Some employers‘ plans cash out accounts under $1,000 or move slightly larger balances into an IRA. Taking the money in cash and moving on can feel like the simplest option, but it can have short- and long-term financial consequences.
A system backed by major 401(k) administrators aims to make it easier for those savings to follow workers to their next job. New research from one of those companies, Vanguard, shows it’s helping fewer people cash out — although most of the money has yet to reach workers’ new retirement plans.
Among workers with less than $1,000 in their 401(k), the share who cashed out within 10 months of leaving their job fell to about 9% from roughly 50% after their employers began participating in a new system called the Portability Services Network, according to the Vanguard research. Among those with balances of between $1,000 and $7,000, the share cashing out fell to 31% from 39%.
Portability Services Network is a coalition of large 401(k) administrators — including Vanguard, Fidelity Investments and Alight Solutions, among others — in conjunction with Retirement Clearinghouse and has been in operation since late 2023.
How it works: When a worker with a small 401(k) balance leaves an employer that participates in the network, the money is generally automatically rolled into a safe harbor IRA, where it remains until the network matches it with the worker’s new employer plan. The balance then gets rolled into the new 401(k) from that interim IRA. The catch, however, is that the receiving employer must also participate in the network for the money to move to the next employer’s plan.
In Vanguard’s research, just 6% of accounts that have been transferred into IRAs as part of this automatic portability network successfully made it to a new employer’s plan as of early 2026, largely because few employers have opted in. The rest generally remained in those interim IRAs, waiting to be matched with another employer plan that participates in the network. While workers can always roll over the money into their new 401(k) themselves, the point of the network is for it to happen automatically.
Of the roughly 220,000 outbound rollovers involving Vanguard participants analyzed, the median balance was just $200, and nearly three-quarters involved less than $1,000. The typical saver affected was 31 years old, earned about $20,000 annually and had worked for their employer for roughly six months, according to the research.
The cash-out analysis is based on workers at 83 employer-sponsored retirement plans administered by Vanguard that have adopted the automatic portability.
Financial consequences of cashing out
Typically, when you part ways with an employer, you can leave your money in its 401(k) plan if the account value is above $7,000. Balances under $1,000 usually result in the plan cashing you out and mailing you a check. For amounts between $1,000 and $7,000, most plans roll the balance over to an IRA if the former employee takes no action to move it themselves.
Cashing out a 401(k) when leaving a job, whether done by an employer or the employee, can have lasting financial consequences. Workers who withdraw their savings can owe income taxes on the money and may face a 10% early withdrawal penalty if they’re younger than 59½. They also lose the opportunity for that money to grow over time.
Most workers — 84% — have changed employers at least once during their careers, while 53% have switched three or more times and 27% have made at least five moves, according to a new study from Empower, a 401(k) recordkeeper and a founding partner of the portability network. The report is based on an online survey of 2,005 adults.
Additionally, 50% of Generation Z respondents and 45% of millennials said they may have retirement savings from a previous employer that they’ve lost track of, the survey found. That compares with 30% of Gen X and 14% of baby boomers.
$71.3 million in assets have made it to new plans
Since the Portability Services Network’s launch in November 2023, there have been 53,118 completed transactions, totaling $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 Portability Services Network strategy and development at Retirement Clearinghouse.
There are 23,787 plans that have adopted automatic portability, representing 7.73 million participants, Holman said. The overall estimate of participants in 401(k)s and similar workplace plans is about 96 million, he said.
There are 1.22 million eligible participants waiting to be matched with a new employer, up more than 25% since the beginning of 2026, Holman said.
Snags remain with the automatic portability process
Keeping the money in a safe harbor IRA can be better for investors financially than cashing out — but management fees may take a toll on small balances, especially when the money is in an interest-bearing cash account or other conservative investment.
“For many of these small accounts, earnings on the conservative default investment may not be sufficient to offset recurring account-level fees while the account remains unmatched, leaving the balance vulnerable to gradual erosion,” the Vanguard study said.
Workers with Roth savings face another complication. If retirement savings are in a traditional 401(k) — funded with pretax contributions and taxed when withdrawn in retirement — it goes into a traditional IRA. Likewise, Roth 401(k)s, funded with after-tax contributions and withdrawn tax-free down the road, go into Roth IRAs.
However, IRS rules don’t allow for a Roth IRA to be rolled into a new employer’s 401(k), even a Roth 401(k).
“We are advocating for future legislation to allow for Roth dollars to be eligible for auto-portability — our technology can support it today,” Holman said.
