Changing jobs can leave workers with a small but easily forgotten 401(k) balance at their former employer. While cashing out may seem convenient, that decision could have lasting consequences for their retirement savings.
Vanguard data identifies cashing out a small 401(k) as one of the costliest mistakes workers make during job transitions.
An automated system, called the Portability Services Network (PSN), an industry coalition designed to help workers move their savings between jobs, has helped reduce the practice, but Vanguard analyzed the employer-sponsored retirement plans of 83 PSN-adopting employers and found another challenge these accounts face.
With Americans changing jobs 15 million to 20 million times annually, a Kiplinger report examined what happened to small-balance retirement accounts after employers joined the Portability Services Network (PSN),
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Cashout rates plunged for small 401(k) accounts after Vanguard adopted the transfer network
About half of workers holding less than $1,000 cashed out within 10 months of leaving, before their employers joined the PSN. After those same plans joined the PSN network, Vanguard found the cash-out rate for that group dropped below 10%.
The shift was less pronounced for workers with balances between $1,000 and $7,000, with the cash-out rate edging down from 39% to 31% after adoption.
Workers in that range often have other options, including leaving assets in a former plan or rolling them into an individual retirement account (IRA).
Some of those who did cash out likely were dealing with pressing financial needs such as debt repayment, Kelly Hahn, Head of Retirement Research at Vanguard, noted in Vanguard’s analysis .
Vanguard analyzed about 220,000 outbound rollovers from its record-kept plans, and the median balance moving through the system was just $200.
The typical participant was around 31 years old and earned a median annual income of roughly $20,000, placing them squarely in the highest-risk cash-out group.
Workers in high-turnover roles stood to benefit the most from the system, because they have historically been the likeliest group to drain small retirement balances.
Auto portability through the PSN counters that pattern by rolling savings into a temporary IRA and then matching them to a new employer’s plan.
How Congress and Vanguard built a system to prevent small 401(k) cashout leakage
Congress laid the groundwork for automatic portability in the SECURE 2.0 Act of 2022.
The involuntary cash-out threshold is the balance size below which a former employer can force a departing worker’s 401(k) out of the plan without that worker’s active consent, typically rolling it into a default IRA or cutting a check.
Under Section 304, the law raised that threshold from $5,000 to $7,000 for distributions made after December 31, 2023, and authorized providers to route those small balances toward the worker’s new employer plan rather than stranding them in a default IRA or pushing them toward a cashout.
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Vanguard, Fidelity, and Alight were the first three record-keepers to go live on the PSN after partnering with Retirement Clearinghouse (RCH) in October 2022; the network’s founding ownership also includes Empower, Principal, and TIAA, Vanguard reported.
The network locates a new employer’s plan and consolidates eligible balances below $7,000, but both employers must participate in the PSN in order for transfers of the 401(k) funds of a departing worker to be possible.
The network has processed 53,118 transactions totaling $71.3 million in transferred assets since November 2023, Steve Holman, a senior vice president at Retirement Clearinghouse, told CNBC.
About 1.22 million eligible participants are still waiting for their accounts to be matched with a new employer plan, according to PSN data confirmed by Holman.
The PSN system keeps small-balance savings inside the retirement ecosystem, but the network’s limited reach is creating a bottleneck that puts those very balances at risk.
Most transferred 401(k) accounts remain stuck in interim IRAs where fees chip away at savings
By early 2026, only about 6% of Vanguard participants with a PSN rollover had been matched to a new employer’s plan, the Vanguard study found. The remaining 94% sat in interim IRAs managed by Retirement Clearinghouse, waiting for a match that may take months or even years to materialize.
That waiting period has tangible costs, because the interim accounts hold savings in conservative default investments where recurring fees can outpace modest returns.
Vanguard acknowledged that this combination leaves small balances “vulnerable to gradual erosion,” and the problem compounds the longer those accounts sit idle.
Roughly 3% of U.S. 401(k) plans participate in the PSN, which means a worker’s next employer is unlikely to be inside the network. Among the 6% who were matched, consolidation took a median of five months, but most accounts remain in interim IRAs, the analysis found.
Fu Tan, a Senior Investment Strategist in Vanguard’s Investment Strategy Group, described the system as one with meaningful potential that has not yet delivered on its full scope.
<strong>These early results really highlight both the promise and the current limitations of auto portability,</strong>
The analysis concluded that wider adoption by plan sponsors and record-keepers, paired with lower fees and better default investments, could help millions carry savings forward.
Vanguard says old 401(k) balances face fee drag as dormant balances age
Consolidating old 401(k) accounts into an active employer plan or a low-cost IRA addresses the fee drain Vanguard’s analysis identified, the firm’s researchers recommended.
The move keeps compounding in the account holder’s favor rather than letting recurring charges eat into dormant savings over months or years of inactivity.
Workers with at least $2,000 in emergency savings were 43 percentage points less likely to cash out their 401(k) during a job change, according to Vanguard research published in August 2025.
“An emergency savings buffer can help households deal with volatility and preserve their 401(k) wealth for retirement,” Aaron Goodman, a Vanguard Economist, said.
Vanguard’s research underscored that for workers who have changed jobs, a dormant balance in a default account means compounding time lost to fees rather than growth.
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