Portable Retirement Plans: Switching Jobs and Keeping Your Savings Gets Easier

The role of the office has changed dramatically, with many employees working outside traditional office spaces in hybrid and remote settings. Yet, even with the increased flexibility of off-site work, the era of employees spending multi-decades, let alone a lifetime, at one job, is long past.

The median job tenure dipped to 3.9 years in January 2024, down from 4.1 years in January 2022, according to the most recent data from the Bureau of Labor Statistics (BLS). That January 2024 figure marked a 22-year low in terms of job tenure.

"This shift has made it increasingly important for individuals to have control over their retirement savings, rather than relying on traditional employer-sponsored pension plans that may not always transfer seamlessly between jobs, says Chad Harmer, Financial Planner and CIO at Harmer Wealth Management."

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Changing jobs often, however, comes with its own problems, such as salary resets, hindering the ability to climb the corporate ladder, getting a promotion and keeping track of retirement accounts. A portable retirement plan (PRP) reduces the risk of an employee losing their retirement savings due to job changes, which is especially useful in today’s workforce where changing jobs is common.

What is a portable retirement plan?

A Portable Retirement Plan (PRP) is a general term for a retirement savings plan that can be easily transferred when an employee switches jobs. The "portability" aspect means employees can take their retirement savings with them from one employer to another without losing accrued funds.

And, unlike most 401(k) plans, employees don't have to go through the expense or hassle of a rollover when they give notice, and employers don't have to worry about abandoned plans left by employees. Not to mention that many small businesses do not or can not offer employee retirement plans, despite recent regulatory efforts to encourage retirement plans within small businesses.

A 2024 survey by ShareBuilder 401(k) found that only 24% of smaller employers provide 401(k) benefits to employees. The reasons vary, but it may be due to the possible costs of audits and other fiduciary requirements of 401(k) plans. Besides that, small or mid-size employers can sometimes pay nearly double the cost to invest, since investment fees for smaller 401(k) plans are about double, according to Benefits Pro.

How does a portable retirement plan work?

Portable Retirement Plans allow employees to easily transfer or “port” their accumulated funds to a different plan when they change jobs. 401(k)s are also inherently portable, but only to the extent that employees can roll over the balance to a new employer’s 401(k) plan or an IRA if they leave their employer. However, a 401(k) is tied specifically to the employer's retirement plan, meaning that it’s not truly portable if the plan doesn’t offer an option to roll it over.

Generally, a portable retirement plan is not tied to a single employer. That means employees can carry their retirement savings across multiple employers. Whereas a 401(k) is directly linked to an employer. So, if an employee leaves their job, they have to decide how to handle their 401(k) — leave it with their former employer, roll it into their new employer’s plan, or transfer it to an IRA.

"Beyond flexibility, I think PRPs address a real need in today’s workforce. A lot of folks don’t have access to traditional retirement plans, especially in gig jobs or small businesses. Naturally, PRPs are like a breath of fresh air for a lot of them," says Paul W Carlson, Managing Partner at Law Firm Velocity.

"It also doesn't hurt that they’re much easier to set up than traditional plans and come with fewer regulatory burdens," Carlson said. "Business owners can offer competitive benefits without getting bogged down in administration."

Like both a 401(k) and an IRA, PRPs allow employees to contribute a portion of their salary to the plan, most often through payroll deductions. The contributions are typically tax-deferred, meaning they won’t pay taxes on the money they contribute until it is withdrawn in retirement. In some cases, employers might also make contributions to an employee’s retirement plan.

If the portable plan is something like an IRA, employees have more control over how the funds are invested, meaning they can adjust their portfolio based on retirement goals and risk tolerance. Once an employee rolls over their retirement funds into a new plan or IRA, their savings continue to grow through investments like stocks, bonds or mutual funds. The main point is that workers' retirement savings keep growing, regardless of changes in employment.

Employees can generally begin withdrawing from a portable retirement plan after reaching retirement age (typically 59-½) without penalties. However, if the money is withdrawn before this age, they may face early withdrawal penalties, depending on the plan and type of account.

Who is a portable retirement plan for?

A portable retirement plan is tailor-made for a wide range of individuals, including contract workers and anyone who changes jobs or companies frequently.

"Portable plans are more convenient than traditional 401(k) rollovers," says Yehuda Tropper, CEO of Beca Life Settlements. "This convenience lowers cashouts by up to 50% and lowers the risk of lost or abandoned funds."

"Portable plans are also great for small businesses and gig workers who usually don't have employer-sponsored retirement plans," he said.

Here's a look at some of the employees that might benefit from a portable retirement plan.

Job hoppers: Rather than leaving funds behind in a previous employer’s plan, job hoppers can roll their retirement savings into a new employer’s plan or an IRA. This ensures their retirement savings are always growing, regardless of how often they change jobs.

"Employees are more aware of the risks associated with leaving their retirement in the hands of a single plan administrator, particularly if they change jobs frequently or transition into retirement," Harmer explains. "Instead, they are opting to take charge of their financial future by commuting their plans when leaving an employer, ensuring they have direct control over their assets."

Self-employed individuals: In many cases, freelancers, gig workers and contractors don’t have access to employer-sponsored retirement plans like a 401(k). Portable retirement plans, such as IRAs, allow them the flexibility of managing their accounts and contributions on their own, independent of their employers.

Part-time or seasonal workers: Workers in part-time or seasonal jobs may have limited access to employer-sponsored retirement plans. A portable retirement plan provides these workers with an opportunity to still save for retirement, even if their jobs don’t offer traditional benefits.

Employees who change companies: Sometimes it makes sense for an employee to quit their job and leave behind their retirement savings with their previous employer. Unfortunately, it can be easy to lose track of the funds over time. Recent estimates have shown that 1 in 5 U.S. workers have a forgotten 401(k) account.

Employees wanting flexibility: Some employees would rather manage their retirement funds independently than be tied to a specific employer’s plan. A portable retirement plan, especially an IRA, allows them to choose which investments match their risk tolerance and goals. PRPs also let employees decide whether to roll over funds or leave them in an existing plan.

However, Said Israilov, Wealth Manager at Israilov Financial acknowledges that rollovers can be notoriously complex and time-consuming. "With a PRP, the worker owns it from day one, eliminating any need for cumbersome rollovers when changing jobs. When I did a 401(k) rollover, I was worried about accidentally triggering a tax event by filling something out incorrectly. A PRP eliminates these challenges."

People with side hustles or multiple jobs: A portable retirement plan can help people who have a side hustle or work multiple jobs save for retirement regardless of whether all or none of their employers offer retirement benefits. Even with several income sources, this flexibility ensures that their savings continue to grow.

People planning for a career change: Having a portable retirement plan ensures that employees who are planning to transition to a new career, retire early or take a sabbatical can access their savings or roll them over without penalties.

Entrepreneurs and small business owners: Entrepreneurs or small business owners may not have the resources to set up a traditional employer-sponsored retirement plan for themselves or their employees. Portable retirement plans like an IRA or a solo 401(k) allow them to save for retirement independently and, if needed, offer options for employees that are flexible and portable.

What are the advantages of a portable retirement plan?

A portable retirement plan is a retirement savings plan that stays with an individual regardless of how often they change jobs. Like any other savings or investment vehicle, it has advantages and disadvantages. Here are the advantages.

• Flexibility – Employees can take the plan with them when changing jobs or changing companies, avoiding the hassle of dealing with multiple employer-sponsored plans.
• Greater control – Employees have control over contributions, investment choices and withdrawals rather than relying on an employer’s plan.
• Tax advantages – Many portable retirement plans, such as traditional and Roth IRAs, offer tax-free or tax-deferred growth.
• Diversification – Employees have a broader range of investment options than in some employer-sponsored plans.
• Avoid losing track of old accounts – A portable plan consolidates savings, reducing the risk of forgetting about or neglecting old employer-based accounts.

Disadvantages of a portable retirement plan

While convenient for the right person, portable retirement plans have a number of disadvantages compared to more traditional 401(k)s. Here's a look at the disadvantages.

• Requires discipline – Since contributions are voluntary, employees must consistently save and invest on their own.
• No employer match – Unlike a 401(k) with an employer match, an IRA does not include company contributions, which can potentially limit the growth of employees savings.
• Contribution limits – Portable accounts, like IRAs, typically have lower annual contribution limits than employer-sponsored 410(k) plans.
• Investment risk – Portable retirement accounts give employees more control over their savings, which means more responsibility. Poor investment choices can hurt their retirement savings.
• Potential fees – Depending on the provider and investment choices, some accounts incur fees.

How Is a portable retirement plan different from a 401(k)?

Types of portable retirement plans

Defined contribution plans — 401(k)s and IRAs, which workers can roll over when they switch jobs are all considered defined contribution plans.

Multi-employer pension plans (MEPPs) — MEPP pensions are funded by member contributions, employer contributions and investment earnings, so once retired, the pension security lasts a lifetime.

Government or union-based plans — Some union-based and public sector pensions have portability agreements, which allow workers to transfer benefits when switching between affiliated employers.

403(b) portable plans — 403(b) plans are specifically introduced for non-profit employees, including hospitals and the education sector.

Last word

Portable retirement plans are retirement savings plans that employees can take with them when changing jobs, and include IRAs or a 401(k). While a 401(k) is a specific type of employer-based retirement plan, and although it has portability features, it is just one example of a plan that could be included under the broader umbrella of "portable" retirement options.

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