Vanguard's How America Saves report for 2022 provided cause for optimism with some of its findings. For example, employee participation rates in Vanguard-managed defined contribution plans remain high, and have not declined year-over-year during the pandemic. The majority of participants in Vanguard plans also increased or maintained their contributions last year, and the average account balance for Vanguard participants increased by 10% year-over-year to $141,542.
However, the report underscored that premature cash-outs of small 401(k) balances continue to threaten retirement readiness for plan participants, especially those who are younger and have less savings. Vanguard noted:
"Most participants with 401(k) balances of less than $1,000 voluntarily or are automatically cashed out of their retirement savings when they leave an employer compared to just 7% of participants with balances over $100,000. Participants who prematurely cash out their retirement savings risk immediate tax consequences, and may forfeit future savings and returns if assets are not reinvested in a tax-sheltered account."
Vanguard also stated that, to resolve this issue, "Auto portability services and revisions to minimum balance rules can help decrease cash-out rates."
Auto portability is the routine, standardized and automated movement of a retirement plan participant's 401(k) savings account from their former employer's plan to an active account in their current employer's plan. Auto portability...
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