Cash-out leakage from 401(k)s–the premature withdrawal of retirement savings for non-retirement expenses–is a persistent problem in the retirement industry, and growing more pervasive as employee mobility increases.
The problem is particularly acute for small-balance 401(k) accounts–those with a balance less than $5,000. Recent studies published by Aon Hewitt, Fidelity and Vanguard all point to a cash out rate of almost 60 percent for these accounts. Retirement Clearinghouse demonstrated that the actual leakage for these accounts may be as high as 89 percent when you factor in the cash out rates of safe harbor IRAs many of these accounts are swept to as a result of a mandatory distribution.
The root cause of cash out leakage is the lack of seamless portability of these accounts when employees change jobs. The Retirement Clearinghouse 2015 Mobile Workforce Survey illustrated the difficulty participants have moving accounts from the previous employer plan to the new plan.
Washington is waking up to the detrimental impact cash out leakage has on the retirement security of millions of Americans, and the need for portability solutions to address it.
The first call in Washington for portability solutions to address cash out the leakage problem came last November from a bicameral group of Congressional members, led by Senator Patty Murray (D-Wash.), in the form of a letter to the Department of Labor’s Employee Benefits Security Administration, urging them to issue guidance on auto portability for employers.
That was followed in January by President Obama, who called for greater portability of retirement benefits in his State of the Union address. The Obama Administration also addressed portability in the President’s 2017 budget proposal by including a $100 million investment in technology solutions to facilitate portability.
The latest call for action came this month from the Bipartisan Policy Center (BPC). The BPC Commission on Retirement Security and Personal Savings issued a report which, among other proposals, recommends the adoption of processes that enable the seamless transfer of retirement savings between defined contribution plans. During the Commission’s panel discussion on the report on June 9, panel participants highlighted the Commission’s recommendation for the establishment of a nationwide private-sector retirement security clearinghouse to help participants seamlessly move retirement savings account balances from plan to plan as they change jobs, and consolidate multiple retirement accounts in a participant’s current-employer plan.
As with the other calls in Washington for improved retirement plan portability, Retirement Clearinghouse applauded these recommendations, and has urged the retirement industry to move forward posthaste with the implementation of Auto Portability – the utility that enables 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.
The average American’s retirement security is at risk without it.
Neal Ringquist is Retirement Clearinghouse's Executive Vice President & Chief Revenue Officer and is a member of RCH's Executive Leadership Team. Ringquist is responsible for the company's overall marketing strategy and for all institutional sales activities.
Neal Ringquist has been at the forefront of developing and delivering innovative wealth management solutions to the retirement and investment advisory market for more than 25 years. He joined RCH from Advisor Software, Inc. (ASI), where he served as President and Chief Operating Officer for nine years.Previously, Ringquist was vice president of sales and marketing for Morningstar Associates, LLC, a registered investment advisor. Earlier, he was executive vice president of sales, marketing and client service for mPower.com, Inc.(acquired by Morningstar), which established him as one of the early enterers into the online advice movement.
He was also Senior Vice President and manager of Institutional Trust Investment Services for Wells Fargo Bank, where he was responsible for portfolio management and investment product delivery for institutional trust clients. Ringquist also held positions with Bankers Trust Company and William M. Mercer Inc.
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