Spencer Williams

With Boston Mayor Marty Walsh’s nomination to become Secretary of Labor advancing through the Senate, the transfer of power in Washington, DC is progressing. Although the Department of Labor is taking direction from a Democratic administration, the solution to the problem of rampant asset-leakage from the U.S. retirement system will remain on track.

After the year we’ve had, it’s no wonder there is so much more concern about financial wellness. But while plan sponsors are well-intentioned in their efforts to help participants increase their retirement savings and other financial outcomes, the latter haven’t noticed.

You don’t need me to remind you that 2020 has been an extraordinary year that many of us would like to forget. The New Year we have been looking forward to for some time is now here.

No, this article isn’t about the Presidential election. But this year’s election, which took place in the middle of a global pandemic, reminds us that some things are in our control, and some things aren’t. 

It’s no secret that interest rates have been at historically low levels for quite some time, but the recent announcement by Federal Reserve Chairman Jerome Powell indicates that rates will stay near zero for the foreseeable future. Chairman Powell stated in his address last month that the Fed would tolerate above-2% inflation instead of attempting to preemptively control inflation by raising interest rates.

It’s bad enough that more than 50 million Americans have filed claims for unemployment benefits since the start of the COVID-19 pandemic and lockdown. But in addition to the disruption, financial hardship, and uncertainty that unemployed Americans (and their families) are experiencing right now, this crisis also threatens their financial security during retirement.

The COVID-19 crisis has created a situation where tens of millions of American workers are in danger of seeing their retirement savings depleted. In addition to the awful death toll, the COVID-19 outbreak has led to extreme disruption in daily life, financial markets, and the economy—especially employment. As of May 28, more than 40 million Americans filed claims for unemployment benefits in the previous 10 weeks. This deadly combination of 1) levels of unemployment not seen since the Great Depression, 2) a significant market downturn, and 3) the ongoing plan-to-plan portability gap, has serious implications for these Americans’ retirement outcomes.

It goes without saying that we are not living in normal times. The health and safety of our families and communities are paramount, and measures to ease burdens and hardships are always appreciated. These include the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the massive fiscal stimulus signed into law on March 27, 2020.

In extraordinary times like these, it is understandable that Americans need emergency cash injections to pay expenses. But before tapping their 401(k)s, workers should at least follow the advice offered by the old saying “think twice,” and consider all sources of short-term cash, before prematurely cashing out their 401(k) savings (WSJ: “The Emergency 401(k) Button,” March 20). Even if tax and other penalties on 401(k) cash-outs during this period are waived, Americans who cash out forfeit the additional savings which the sums they receive would have accrued by retirement, had they remained incubated in the U.S. retirement system.

Although defined contribution plan recordkeepers and sponsors have made considerable progress helping participants retain savings through reduced fees over the past decade, job-changing participants’ 401(k) savings account balances remain in a state of dangerous limbo, as participants often succumb to the temptation of cashing out. EBRI reports that at least 4.5 million—or 40%—of job-changing participants cash out $92.4 billion in 401(k) savings from the U.S. retirement system every year.