If you think you already fully comprehend just how big the problem of 401k cashout leakage is, you may be thinking too small.
To grasp the magnitude of 401k cashout leakage, expand your mind and think bigger, as in Carl Sagan’s “billions and billions” big. Yes, the leakage problem is massive, but so is the opportunity in solving it.
In an Issue Brief published on August 15, the Employee Benefit Research Institute (EBRI) released new 401k cashout leakage figures, pegging annual cashout leakage in 2015 at $92.4 billion.
Before addressing the magnitude of $92.4 billion in cashout leakage, let’s establish the figure’s credibility. The new estimate was generated by EBRI’s Retirement Security Projection Model (RSPM), which relies upon the EBRI/ICI 401k Database – consisting of proprietary data from participating recordkeepers.
The database includes details on 27.1 million participants in 110,794 plans, covering 49 percent of the universe of 401k plan participants and 44 percent of 401k plan assets.
In fact, at Retirement Clearinghouse (RCH), we found the newest EBRI values so credible that we’ve decided to reset our National Retirement Savings Cashout Clock, increasing the annual cashout rate by over $24 billion.
The chart below indicates EBRI’s leakage estimates from 2009-2015, which have increased every year except 2011, when they dipped slightly.
Chart 1: EBRI 401k Cashout Leakage Projections
Dare to Compare?
$92.4 billion is a lot of leakage.
- It’s greater than the gross domestic product (GDP) of 147 countries and 13 U.S. states.
- It’s greater than the amount that the U.S. federal government plans to spend in 2020 on 7 large government agencies and is only slightly less than the projected expenditures on Veterans Affairs ($93.1 billion).
Chart 2: 401k Cashout Leakage vs. Projected 2020 U.S. Government Spending
- It’s 185% greater than the amount the United States spent on the New Deal ($50 billion) from 1933-1940.
You may take some comfort in the fact that, although $92.4 billion is a very large number, it’s exceeded by the number of stars in the Milky Way (100 billion) and the number of galaxies in our universe (also 100 billion).
But it’s close enough.
The opportunity to address 401k cashout leakage
At a minimum, the new EBRI figures above should convince you that addressing 401k cashout leakage is an important retirement savings public policy initiative.
Fortunately, research indicates that approximately two-thirds of 401k cashout leakage is avoidable, and is not due to a financial emergency. Therefore, policy initiatives that effectively reduce cashout leakage could deliver significant benefits.
For example, the EBRI Issue Brief providing the new figures on cashout leakage also presented the potential benefits of auto portability, which EBRI estimates to be $1.5 trillion (for accounts with balances less than $5,000), or $2.0 trillion for all balances. These projected benefits are a direct consequence of stemming cashout leakage.
Tom Hawkins is Senior Vice President, Marketing and Research with Retirement Clearinghouse, and oversees all key operational aspects of this area, including RCH’s web presence, digital marketing and plan sponsor proposals. In other roles for RCH, Hawkins has performed product development, helped lead the company’s re-branding, evaluated and organized industry data and makes significant contributions to RCH thought leadership positions.
Tom Hawkins is Senior Vice President, Marketing and Research with Retirement Clearinghouse. He oversees all critical operational aspects of this area, including RCH’s web presence, digital marketing, and plan sponsor proposals. In other roles for RCH, Hawkins has performed product development, helped lead the company’s re-branding, evaluated and organized industry data, and makes significant contributions to RCH thought leadership positions.
