In May, Retirement Clearinghouse announced the National Retirement Savings Cashout Clock, a virtual clock that calculates 2017 year-to-date cashout leakage in real time from America’s defined contribution system.
At the time it was announced, the clock had already registered $24.4 billion in cashouts. Since then, it’s added another $16 billion, and crossed the $40 billion mark in late July. As of this writing, $42.3 billion in cashouts have occurred thus far in 2017. If nothing happens to stem the flow, we’ll reach $68 billion in cashouts by year’s end.
Industry conferences often focus on participant education, financial wellness, plan design and retirement income solutions.
While important topics to be sure, there’s hardly a word about the scourge of cashout leakage, and how it works to massively undermine every one of these initiatives. Even the conversations taking place on leakage address only the tip of the leakage iceberg–loan defaults and hardship withdrawals–and not its hidden underbelly: cashouts. It was brought home in a 2009 GAO report, which illustrated that premature cashouts represented 89 percent of all retirement plan leakage.
And of course, there’s the fiduciary rule. Everyone from pundits to policymakers to plan sponsors, and of course, almost every provider, is pre-occupied with the fiduciary rule. While eliminating conflicts of interest is a worthy goal, proponents of the measure have (optimistically) estimated its potential benefits at $17 billion per year.
Solving cashout leakage is not only easier than eliminating conflicts of interest, it delivers more in the way of tangible, measurable benefits. An initial analysis by EBRI in 2012 indicated that slashing cashouts by half would result in an additional $1.3 trillion in retirement savings over 10 years.
Since that time, we’ve learned a lot more about how to address the cashout leakage problem:
- In 2013, a Boston Research Group study revealed that a program of retirement savings portability actually reduced cashout leakage by half.
- Another study of America’s Mobile Workforce confirmed that only a third of cashout leakage is driven by financial hardship, and that participants would choose the “easy option” of cashing out, but were reluctant to endure the headaches associated with “do-it-yourself” portability.
- Using EBRI data, the Auto Portability Simulation modeled millions of individual choices, revealing that 2.9 million small-balance job-changers’ retirement savings could be preserved each year, if their balances were simply moved forward at job change.
Incorporating this new information, a 2017 EBRI model determined that auto portability, when applied only to the sub-$5,000 balance segment, would reduce the retirement savings shortfall by $1.5 trillion.
The new EBRI estimate is important because it only counts the reductions in cashout leakage that apply to households that fall short of the model’s threshold for retirement savings.
Much like the National Debt Clock, the National Retirement Savings Cashout Clock is meant to draw attention to a serious, ongoing problem that requires action.
But unlike the national debt, solving cashout leakage is something that, with the support of policymakers, can quickly be addressed by the private sector within the framework of auto portability.