Cash out leakage – 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 retirement 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% for these accounts. Retirement Clearinghouse demonstrated that the actual leakage for these accounts may be as high as 89% 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 9th, 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.