With the recent announcement that the nationwide launch of auto portability will be led by Alight Solutions, the good news is that deliberate action can now be taken by the private sector to stem cashout leakage, help close the emerging COVID-19 retirement savings gap and deliver ongoing benefits that will extend well beyond the current crisis.
Retirement Savings B.C. (Before COVID-19)
Following the Great Recession and entering 2020, there was already concern that Americans were not saving enough for retirement.
This period saw lawmakers focused on increasing retirement savings by enacting legislation that expanded access to workplace retirement savings (ex. – SECURE Act), facilitated state-based Auto IRA programs (ex. – OregonSaves), and promoted the use of “auto” features (ex. – the Pension Protection Act).
Meanwhile, scant attention was given to the massive, unnecessary leakage pouring out of retirement plans. For 2015, EBRI estimates that $92.4 billion was lost due to 401(k) cashout leakage, representing 40% of terminated participants and 15% of plan assets. Other studies estimate that two-thirds of cashouts are unnecessary, and not related to a financial emergency.
The most-recent retirement savings deficit – as captured in measures such as EBRI’s Retirement Savings Shortfall (RSS) – stood at $3.83 trillion, and that was in the “good times” prior to the pandemic.
The COVID-19 Retirement Savings Gap
In a very short time, retirement asset values have eroded, the number of terminated participants has dramatically increased, and a rising wave of premature cashouts has yet to crest – all due to COVID-19.
Whereas in good times, policymakers’ actions promoted retirement savings, provisions of the CARES Act relaxed restrictions on pre-retirement withdrawals. While these actions have been well-intended, there’s little question they’ll serve to grow the nation’s retirement savings deficit – it’s only a question of how much.
Taken in total, one could think of the growth in the deficit as the “COVID-19 retirement savings gap.” This gap in retirement savings gap will affect women, minorities, younger-age and lower-income workers the most, as these are already the demographic segments most adversely impacted by cashout leakage. In a particularly cruel irony, younger workers – who will demonstrably suffer the least in terms of ill health effects, will likely be the group that sees the greatest damage done to their retirement prospects.
What the Private Sector Can Do
While it’s tempting to look to policymakers to help close the gap, there’s already solutions the private sector can embrace.
1. Adopt auto portability
Prior to the COVID-19 pandemic, the case for auto portability was strong, and based on a solid foundation of research. For example, the Employee Benefit Research Institute (EBRI) estimated that full adoption of auto portability could preserve $1.5 trillion in retirement savings, when applied to balances under $5,000. Auto portability will now be launched on a nationwide basis, allowing the private sector to embrace the new plan feature.
2. Eliminate automatic cashout provisions for balances less than $1,000
There’s no longer a reason to automatically cash out terminated participants’ balances of less than $1,000, when they can be automatically rolled over instead. Automatic cashouts are a problem for both plans and participants. Participants lose their qualified retirement savings, while plans often end up with large numbers of uncashed checks.
3. Provide education and assistance to terminated participants
Engaging newly terminated, vulnerable participants with education and assistance is vital to ensuring that they’re adequately protected. If a participant is not facing a financial emergency, carefully explain their options and illustrate the high cost of cashing out with a cashout calculator. In many cases, that can prevent an unnecessary cashout altogether, or convince a participant to take a partial withdrawal. This approach has been proven to reduce unnecessary cashouts by over 50%, across all balance levels.
There’s no question that these are challenging times in which we live. However, if the private sector takes determined action now, future generations of retirees will be grateful they did.