Understanding (and Solving) the Problem of Women’s 401k ‘Leakage’

A retirement savings auto portability program could incubate small 401k balances

401k, leakage, retirement, auto-portabilityHow is it best addressed?

New data was recently presented at the Women’s Institute for a Secure Retirement (WISER) that highlights challenges in preserving their 401k savings when changing jobs, particularly for women with balances less than $5,000.

Compiled by Retirement Clearinghouse (RCH), indicates that women with small 401k balances cash out much more frequently than their male counterparts.

However, as women’s 401k balances grow, they’re more likely to preserve their retirement savings.

These behaviors suggest that a retirement savings auto portability program could incubate small 401k balances, allowing them to more effectively grow savings to a level where “better” behaviors prevail.

Leakage By-the-Numbers

Using a multi-disciplinary approach that incorporated women’s representation in defined contribution plans, participant turnover rates, an Auto Portability Simulation and the EBRI/ICI 401k database, insight was gained into post-separation, job-changing cashout behavior, including:

  • Women collectively represent about 40 percent of all defined contribution plan participants.
  • Each year, an estimated 5.9 million women participants will change jobs, according to Vanguard.
  • Of these 5.9 million women job-changers, approximately 2.4 million, or 41 percent will cash out $28 billion in retirement savings, paying taxes and penalties.
  • 2.1 million, or 36 percent will have balances less than $5,000. Of these, 1.5 million—a whopping 71 percent—will cash out $2.6 billion in savings.
  • Over a generation, 104 million women will cash out almost $800 billion in retirement savings in today’s dollars.

Drawing on a 2015 survey by Boston Research Technologies, the RCH data also revealed that, below $5,000, women of all ages tended to cash out at a much higher rate than their male counterparts, as indicated in the graph below.

Chart 1 – Women’s Odds of Cashing Out Small Balances
Source: Actionable Insights for America’s Mobile Work Force, Boston Research Technologies (2015).












The Promise of Portability

A more promising data point was revealed in a 2011 study by Aon Hewitt, indicating that women—at higher balance levels—were more likely than their male counterparts to preserve their retirement savings from job-to-job.

The finding seems to mirror other research suggesting that efforts to move participants’ balances to higher thresholds can act as an effective deterrent to cashouts.

In preserving and incubating women’s small 401k balances, auto portability delivers.

Incorporating the results of the Auto Portability Simulation, RCH figures show that, on an annual basis, auto portability would preserve the savings of 1 million women participants.

Over a generation, 42 million women would preserve their retirement savings, worth about $365 billion in today’s dollars.

While the systemic results of auto portability are impressive, its effect at an individual level is equally impactful.

The RCH analysis finds the individual impact of preserving one to three $5,000 balances over the course of a career, as shown in the figure below.

Preserving just one $5,000 balance at age 25 can result in $70,000 in retirement savings, whereas three $5,000 balances preserved over the course of a career could result in an additional $123,600 in retirement savings.

Figure 1 – Value of Preserving $5,000
Source: Retirement Clearinghouse.










Taken together, the new data presented at the WISER roundtable demonstrate that by reducing cashouts, consolidating balances and achieving higher balance levels, women could benefit disproportionately from the widespread adoption of auto portability.

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 and organized industry data and makes significant contributions to RCH thought leadership positions.

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