In 1989, New York real estate developer Seymour Durst wanted to highlight America’s rising national debt, and came up with the National Debt Clock. Since then, the National Debt Clock has had a physical presence as a billboard near Times Square, serving as a constant reminder to Americans of their government’s ever-growing debt.
In the spirit of Durst, Retirement Clearinghouse has launched a National Retirement Savings Cash Out Clock. While it’s not an actual billboard, this virtual clock calculates 2017 year-to-date cash-out and leakage rates from our 401k system, highlighting in real time the ongoing problem of early distributions.
As of May 12th, the clock tells us total cash-out leakage for 2017 has reached $24.4 billion. If no action is taken to stem the outflow, 401k cash-out leakage will eventually reach $68 billion by year’s end.
It starts ticking with job turnover
Changing jobs, or turnover, is the first key to understanding the cash-out leakage problem. It’s no secret that the American worker is highly-mobile, and there’s a plethora of data available from sources like the Bureau of Labor Statistics and the Census Bureau that speaks to it.
However, research from the Employee Benefit Retirement Institute (EBRI) provides highly-accurate information on job-changing within America’s defined contribution system.
Utilizing a database of over 25 million participants, EBRI finds that approximately 14.8 million, or roughly 22 percent of all active and contributing defined contribution participants, will change jobs each year.
Applying the results of major recordkeeper cash out studies, we find that 6 million participants, or 41 percent of these job-changers, will cash out completely.
This data further allows us to estimate cash-outs that are occurring at various balance levels. Not surprisingly, we find that 4 million participants who cash out will have a balance of less than $5,000.
Importantly, other studies by Ariel Investments/Aon Hewitt and Vanguard indicate that that the participants most-affected by cash out leakage include younger age groups, lower income segments, women and minorities.
A solution
What may surprise many is that most of these cash outs could be easily prevented.
A 2015 survey by Boston Research Technologies of America’s mobile workforce determined that only 37 percent of these cash outs were for economic emergencies, where a participant had an urgent need for funds. Fully 63 percent of the cash outs were made for various, discretionary reasons, simply because taking a distribution (including the payment of penalties and taxes) was the easiest action to take.
The study further demonstrated that removing the systemic “frictions” and providing retirement savings portability could easily prevent these unnecessary cash-outs.
We hope the National Retirement Savings Cash Out Clock will serve to focus more attention on the problem of cash-out leakage and encourage all parties, including policymakers, service providers and plan sponsors to take steps to facilitate retirement savings portability, including supporting auto portability.
When it comes to America’s retirement security, the clock is ticking.
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.
