--- title: Five Misconceptions About 401(k) Leakage description: This video presentation is designed to provide qualified retirement plan sponsors with an understanding of the facts and popular misconceptions surrounding the topic of 401(k) plan leakage. image: https://embedwistia-a.akamaihd.net/deliveries/30d809825904fef3dd692fc1f8819d883bfbfec9.jpg?image_crop_resized=640x480 --- [![Retirement Clearinghouse Logo](https://blog.rch1.com/hs-fs/hubfs/raw_assets/public/Retirement_Clearinghouse_May2022/images/logo.png?width=1000&height=648&name=logo.png "Retirement Clearinghouse Logo")](https://rch1.com/) [Privacy Policy](https://securities.rch1.com/common/PrivacyStatement.pdf) [Sponsors/Service Providers](https://rch1.com/plan-sponsors) [Individuals](https://rch1.com/individuals) [Login](https://rch1.com/#) - [Home](https://rch1.com/home-page) - [Individuals](https://rch1.com/individuals) - [Individuals Home](https://rch1.com/individuals/individuals-home) - [Who is RCH?](https://rch1.com/individuals/who-is-rch) - 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The largest recordkeepers have produced studies that analyze leakage, and they all agree: it’s a big problem. - The ERISA Advisory Council has taken up the issue of promoting lifetime plan participation, which – in large part – examines how to minimize this problem. - High levels of cashouts adversely impact plan metrics, reduce average balances and increase recordkeeping fees. However, there are plenty of misconceptions about 401(k) leakage. Let’s examine five of them.       ![Video Thumbnail](https://embedwistia-a.akamaihd.net/deliveries/30d809825904fef3dd692fc1f8819d883bfbfec9.jpg?image_crop_resized=640x480)     Click for sound                             **Misconception #1: Loan defaults are the biggest type of leakage.** Not according to the [GAO](http://www.gao.gov/assets/300/294520.pdf): - Loan defaults represent only about 10.8% of cashout leakage. - The largest single source of leakage are cashouts that occur post-job change, accounting for 88.5% of total leakage. **Misconception #2: Financial hardship is the single biggest cause of leakage.** Just over 1/3 of leakage is due to financial hardship: - The [GAO reports](http://www.gao.gov/assets/300/294520.pdf) that in-service hardship withdrawals account for only 0.7% of leakage. - Post-separation, 37% of cashouts are made for “emergency” purposes, where a participant has an urgent need for funds ([Boston Research Technologies](https://info.rch1.com/mobileworkforce)). Thus, almost two-thirds of cashout leakage occurs for non-hardship reasons. **Misconception #3:  Leakage is only a problem when participants change jobs.** It’s true - leakage IS a big problem when people change jobs.  However: - Most leakage studies only look at distributions of participants who leave their jobs within any given calendar year. - Leakage from “stranded” 401(k) accounts continues long after the employee leaves. This “slow leakage” can be significant, occurring steadily at annual rates of 6.5% to 12.3% for over 7 years following a job change. **Misconception #4: Cashout leakage by former employees doesn’t matter.** Many sponsors take the position that cashouts by separated participants doesn’t matter.  This is a short-sighted view: - Participants are cashing out an employer’s matching contributions as well. - In many industries (ex. – healthcare), employees periodically leave and return. - Indifference towards the actions of separated participants is a position that’s inconsistent with fiduciary responsibility, not to mention corporate social responsibility. **Misconception #5: Small account leakage is not a big problem.** Even small-balance cashouts matter – particularly when they occur early in a career. For example: - When a 30-year old with a $1,679 balance cashes out, they’ll net $1,175 in cash, after taxes and penalties. - That same participant who avoids cashing out and consolidates their balance into a new 401(k) could end up with $17,926 at retirement. **Where can I get additional information?** For more information, visit: [RCH1.com/auto-portability](https://rch1.com/auto-portability)   [Back](https://blog.rch1.com/blog) [![Retirement Clearinghouse An RLJ Company](https://blog.rch1.com/hs-fs/hubfs/raw_assets/public/Retirement_Clearinghouse_May2022/images/footer_logo.png?width=1000&height=648&name=footer_logo.png "Retirement Clearinghouse An RLJ Company")](https://rch1.com/) 1916 Ayrsley Town Boulevard Suite 200 Charlotte, NC 28273 - [Individuals](https://rch1.com/individuals) - [Plan Sponsors](https://rch1.com/plan-sponsors) - [Auto Portability](https://rch1.com/auto-portability) - [Company](https://rch1.com/company) - [News & Information](https://rch1.com/news) - [Mission](https://rch1.com/company/mission) - [Careers](https://rch1.com/company/careers) - [Contact Us](https://rch1.com/contact-us) - [Logins](https://rch1.com/#) - [Disclosure Central](https://rch1.com/individuals/learning-center/resources-%26-downloads) - [Do Not Sell or Share](https://blog.rch1.com/blog/five-misconceptions-about-401k-leakage#decline-cookies) - [My Personal Information](https://blog.rch1.com/blog/five-misconceptions-about-401k-leakage#decline-cookies) - - - Individuals should consult their tax advisers or legal counsel for advice and information concerning their particular situation. 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