Another Earth Day has come and gone, and we’re once again reminded of the need to protect our environment.
The heightened awareness is testament to how far Americans have come in both recognizing and curbing the wasteful, destructive behaviors that emerged in the decades following World War II. Those excesses highlighted modern conservation and environmentalism heralded by the first Earth Day in 1970.
Today’s Wasteful Behavior: Cash-Out Leakage
While we may be more environmentally-conscious, we don’t apply the same principles and passion financially, though it could be argued they are equally important. Simply put, there is highly-wasteful and harmful behavior that silently robs millions of people of the prospect for a comfortable or timely retirement.
Every year, Americans will needlessly cash out their retirement savings after changing jobs, converting these savings into wasted consumption and avoidable tax penalties.
Newly-compiled statistics paint a grim picture:
- In 2017, approximately 14.8 million defined contribution plan participants will change jobs.
- Of these job-changing participants, over 31 percent, or 4.7 million, will cash out their retirement savings in the first year following their separation.
- Another 1.4 million will cash out their savings over the next seven years.
- In total, 6.1 million, or 42 percent of the job-changers from the “class of 2017” will eventually cash out over $68 billion in retirement savings.
Digging deeper into the demographics of cash out leakage, the statistics further demonstrate that the participants most-affected by cash out leakage can least afford it, including:
- Younger age groups, particularly Millennials
- Lower income groups
- Women
- Minorities, particularly African-Americans and Hispanics
Solving the Problem of Cash-Out Leakage
The good news is that we understand its causes and how to prevent most of it.
A 2015 study of America’s mobile workforce found that most job-changing plan participants, when faced with the difficulty of “do-it-yourself” portability, simply took the path-of-least-resistance and cashed out their retirement savings, while slightly more than a third of participants who cashed out actually needed the funds for an economic emergency.
From a behavioral perspective, if moving retirement savings forward to the next employer’s plan were made as easy as cashing out, then almost two-thirds of the cash out leakage problem could be solved.
Consequently, auto portability is the first innovation that could spell the end for excessive cash-out leakage. Auto portability is the routine, standardized and automatic movement of an inactive participant’s small balance retirement account (less than $5,000) from a former employer’s retirement plan to an active account at a new employer’s retirement plan, when a participant changes jobs.
Auto-portability has gained some influential supporters who believe that reducing cash out leakage could deliver a massive benefit to our economy and is achievable by the private sector.
New research from EBRI, presented on March 30, 2017 at a forum hosted by the Financial Services Roundtable, has calculated the present value of Auto Portability’s benefits at $2 trillion.
This analysis places auto portability ahead of auto IRA initiatives and just behind universal defined contribution coverage in terms of the impact on the total retirement savings shortfall. By any definition, this analysis clearly establishes auto portability as a leading public policy initiative.
At the same event, former Sen. Kent Conrad of the Bipartisan Policy Center expressed his support for a private-sector “retirement security clearinghouse” to help job-changers consolidate their retirement savings. The BPC’s position clearly demonstrates the strong bipartisan support that auto portability enjoys, and that its benefits could be efficiently delivered without imposing a burden on America’s taxpayers.
We’re seeing encouraging signs that the problem of retirement savings cash out leakage will finally get the attention that it deserves.
And for a more dramatic, visual representation of the problem of cash out leakage, visit Retirement Clearinghouse’s National Retirement Savings Cash-Out Clock, which depicts an up-to-the-minute counter of the retirement savings already cashed out in 2017.
Tom Hawkins is vice president of sales and marketing 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 & organized industry data and makes significant contributions to RCH thought leadership positions.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
