The tools to eradicate smallpox existed before 1966. All that was missing, until then, was a global initiative dedicated to wiping out the disease — backed up by the will and resources of the international community to carry it out. Similarly, the tools to eradicate cash-out leakage are already here. What’s needed is a concerted effort by plan sponsors and their service providers to make auto portability the new default that will change participant behavior, eradicate cash-out leakage, and dramatically improve the financial wellness of millions of workers.
If retirement sponsors and record-keepers across the U.S. demonstrate this level of dedication to improving the financial well-being of all hardworking Americans, they could put a stop to tens of billions of dollars leaving our nation’s retirement system due to cash-outs.
While this objective isn’t in the same league as wiping out a horrible disease everywhere on Earth, it’s a worthy endeavor that would help millions of Americans preserve more of their retirement savings.
Keeping 401(k) savings in the U.S. retirement system throughout one’s working life offers the best chance to achieve a financially secure retirement — but frictions within the retirement system make it costly and time-consuming for plan participants to move their savings from their former employer’s plan to their current plan when they change jobs.
Of the approximately 66.2 million defined contribution plan participants, about 22% change jobs each year, according to the Employee Benefit Research Institute — and based on research findings from the largest record-keepers, 31% of those 14.8 million job-changers (4.6 million participants) will cash out within a year of changing jobs, forfeiting the collective billions of dollars in compounded savings they would have accumulated by retirement had they not cashed out.
As reported in a 2015 study of the mobile workforce conducted by Boston Research Technologies, about 63% of these cash-outs are for non-emergency purposes. In other words, the majority of participants cash out, and reduce their future retirement income, because they view cashing out as an easier option than rolling their savings in a prior-employer plan into their account at their current-employer plan.
As of May 22, approximately $26.3 billion in total savings has been cashed out of the retirement system this year, according to the National Retirement Savings Cash-Out Clock. If nothing is done to stem the outflow, this cash-out “leakage” of assets from the retirement system will reach $68 billion by year-end.
This is a major financial health crisis affecting millions of Americans — and industry research indicates that younger workers in the lowest income brackets, as well as women and minorities, are at the highest risk of cashing out. Confronting this crisis requires a concerted, unified effort by plan sponsors and record-keepers to create conditions that facilitate seamless plan-to-plan asset portability for all participants.
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