I Moved My Retirement Money and Lived to Tell About It

When workers leave jobs with 401(k) balances of less than $5,000, employers can automatically unload that money into a new IRA. These small balances often end up sitting in cash, where their value gets whittled away to nothing by inflation and fees. Or, worse, people just cash the things out and spend the money. As many as two in five workers cash out small 401(k) balances as they leave their jobs. Their savings never get a chance to grow, and they pay taxes and penalties in the process. A Charlotte, North Carolina-based company called Retirement Clearinghouse thinks it has the answer. It's offering to build the technological pipes needed to connect 401(k) plans and IRAs, and it's pushing "auto-portability" so retirement savings would follow workers from job to job. Under auto-portability, when workers left a job with a small balance in their 401(k), employers would send the money to a clearinghouse rather than creating a new IRA. The clearinghouse would hold on to the worker's cash, for a small fee, and then send it on to their new employer's 401(k) when they got a new job. The whole process would be automatic, though workers could stop it at any point — if, for example, they'd rather send the money to an existing rollover IRA instead.

Minsky's group, which is made up of large employers, 401(k) providers, and investment firms, is enthusiastic about the idea. It's the rare case of a proposal with hardly any enemies. Investment companies and 401(k) providers would get more money to manage. Plan administrators would have fewer hassles keeping track of tiny accounts and, another common problem, uncashed checks. Workers would get more retirement savings. "It's a common sense solution that we really should have done a long time ago," Kreps, the pension lawyer, said. 

But retirement plan regulations are complicated, and Retirement Clearinghouse is waiting for a ruling from the U.S. Department of Labor making clear that it's legal to transfer savings automatically in this way. The ruling would apply only to accounts of under $5,000. An account of $15,000, for example, would still stay at an old 401(k), in whatever investments a worker has chosen. 

Such a system could soon have a broader impact, however – assuming the Labor Department gives its blessing and large retirement plan providers then get serious about solving the rollover problem. Once a system is built that standardizes how small accounts are transferred, it gets much easier to move even the largest accounts. 

That could effectively end your retirement rollover hassles. Savings from one job would follow you to your next, automatically or just by checking a box during new-employee orientation.

— Check out Ric Edelman: What's Wrong With IRAs, 401(k)s, and the Industry That Sells Them on ThinkAdvisor.