Cashouts beware! Retirement Clearinghouse, LLC reported today that it has consolidated more than 290,000 retirement accounts, comprising over $10 billion in assets, into existing 401k or IRA accounts.
The company said in a statement that this milestone represents a greater than threefold increase in the amount of retirement account transfers completed on behalf of American workers in just six years—enabling significantly more of them to avoid unnecessary cashouts and accumulate more savings for retirement, while improving average account balances and other metrics for plan sponsors.
“Now more than ever, our country needs to close its retirement-savings shortfall so more Americans can enjoy financial security when they retire,” said Spencer Williams, founder, president, and CEO of Retirement Clearinghouse. “We have been privileged to lead the private sector’s efforts—underpinned by bipartisan support in Washington, D.C.—to develop solutions which make it easy for plan participants in the mobile workforce to seamlessly transfer and consolidate their 401k savings at the point when they change jobs. This account-consolidation milestone is a testament to the commitment of so many plan sponsors, recordkeepers, third-party service providers, and government agencies and officials to helping underserved and under-saved Americans catch up and save what they need to meet expenses and financial goals in retirement.”
Retirement Clearinghouse had consolidated more than 113,000 accounts totaling over $3 billion in assets into existing IRA or 401k accounts as of April 2015. More than six years later, the company’s ongoing collaboration with the private and public sectors has made it easier for more American retirement-savers to easily take their 401k savings with them as they move from employer to employer, and avoid making decisions which could decrease their income in retirement.
Recognizing the problem
According to the Employee Benefit Research Institute (EBRI), $92 billion leaves the U.S. retirement system—and the vast majority of this leakage is due to job-changing participants prematurely cashing out their 401k accounts, and paying related taxes and penalties, when they switch employers.
The lack of a seamless process for transporting and consolidating 401k accounts has made leaving them behind in former-employer plans, or cashing them out, the easiest options for participants when they go to new jobs. Neither choice is ideal, but cashing out is particularly destructive.
Retirement Clearinghouse’s research has found that a hypothetical 30-year-old participant who cashes out a 401k account with $5,000 today would forfeit up to $52,000 in earnings they would have accumulated by age 65, assuming the account would have grown by 7% per year.
EBRI estimates 14.8 million participants switch jobs every year, and data from the largest plan recordkeepers indicates that nearly one-third (31%) of these participants will prematurely cash out their 401k within one year of arriving at another employer. Cash-out rates within a year of job change are higher among workers who are between ages 20 and 29 (44%), earn $20,000 to $30,000 in annual income (50%), and belong to minority communities (63% for Black Americans and 57% for Latinos).
Furthermore, the adoption of auto enrollment by plan sponsors, under the Pension Protection Act of 2006, has also led to the present surge in small accounts in defined contribution plans. EBRI reported that 41.8% of plan participants in the EBRI/Investment Company Institute (ICI) 401k database had under $10,000 in their 401k savings accounts at year-end 2018—the database’s highest percentage of participants with under $10,000 in their 401k accounts since year-end 2008, during the financial crisis.
Building momentum for nationwide adoption
A consolidation saves participants time and redundant account expenses, simplifies retirement planning, and greatly reduces the odds of a cashout, or having a stale address associated with a retirement account left behind at a previous employer.
Retirement Clearinghouse has worked with partners in the private and public spheres to resolve the vicious circle caused by high workforce mobility, lack of seamless plan-to-plan asset portability, and auto enrollment by offering solutions that facilitate account consolidation. One technology-based solution that the company introduced is auto portability—the routine, standardized, and automated movement of a worker’s 401k savings account from their former employer’s plan to an active account in their current employer’s plan.
Retirement Clearinghouse completed the first-ever fully automated, end-to-end transfer of retirement savings from a safe-harbor IRA into a participant’s active account in July 2017, on behalf of a large plan sponsor in the health services industry. Four years later, more than 2,000 participants with 401k accounts in former employers’ plans have consented to utilize the service to transfer their savings into active accounts in their current employers’ plans.
Further progress toward fully automated transfers was made in July 2019 and November 2018, when the U.S. Department of Labor issued regulatory guidance which removed obstacles to enabling sponsors and recordkeepers from adopting the technology powering auto portability. Last year, Alight Solutions announced it would offer auto portability to its client base of 185 defined contribution plan sponsors serving nearly 5 million employees.
This momentum is crucial. According to EBRI, approximately $2 trillion in additional retirement savings would be preserved in the U.S. retirement system over a 40-year period if all retirement savers had access to auto portability. This extra savings would include an estimated $191 billion for about 21 million Black Americans, and $619 billion for all minority workers.
Originally established as RolloverSystems in 2001, Charlotte, N.C.-based Retirement Clearinghouse works with more than 30,000 retirement plans and has helped guide over 1.6 million plan participants with more than $24 billion in retirement savings. The company remains the only independent provider that defines its primary business as the consolidation of retirement savings into active 401k or IRA accounts and provides plans and their participants with services that streamline the transfer of savings between retirement accounts.
SEE ALSO:
• 5 Misconceptions About Automatic Rollovers
• New Data Proves Effectiveness of 401k Auto-Portability
• The Strong Case for a Retirement Savings ‘Lost and Found’
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
