Highway Through the 'Danger Zone'

By Thomas Hawkins | April 28, 2023

Highway Through the Danger ZoneThe 401(k) cashout leakage problem is once again in the news, with the publication of an alarming study by academics, as well as new data from Fidelity Investments revealing a cashout leakage ‘danger zone’ facing participants between the ages of 30-39.

These studies, combined with the mounting weight of empirical evidence gathering for more than a decade, confirm that 401(k) cashout leakage is a huge, persistent problem.

Given the unanimity on cashout leakage, it might surprise you to learn there’s also equally compelling real-world data that supports the efficacy of retirement savings portability in dramatically reducing unnecessary cashout leakage. Gathered over a period of 19 years, the data reflects the ongoing post-termination decisions of almost 1 million job-changing participants, both before and after exposure to a comprehensive program of retirement savings portability.

The Settled Question of 401(k) Cashout Leakage
On the question of cashout leakage, the jury is in – the problem is bad and is not improving.

Two recent findings confirm what we already knew. Featured in the Harvard Business Journal, the November 2022 study Cashing Out Retirement Savings at Job Separation examined 162,360 terminating participants in 28 retirement plans, finding that 41.4% cashed out some or all or their retirement savings. In a 2023 EBRI webinar, Fidelity presented data describing a ‘danger zone’ for cashout leakage between the ages 30-39, regardless of employee tenure.

These findings come on the heels of a 2019 meta-analysis by the Savings Preservation Working Group (SPWG), revealing that at least 33% and as many as 47% of plan participants withdraw their retirement plan assets following a job change, with the lost savings due to cashouts amounting to $60 billion to $105 billion annually.

The Case for Retirement Savings Portability
While the data concerning cashout leakage is uniformly bleak, there is now compelling evidence that retirement savings portability could dramatically reduce leakage by almost 60%.

These conclusions are drawn from an extraordinary, longitudinal dataset from a mega plan sponsor (250,000+ participants) in the healthcare industry and covering the period from 2002 to present, representing the behaviors of almost 1 million job-changing participants.

During the period 2002-2006, when there was no structured program of retirement savings portability, the plan experienced annual cashout leakage levels averaging 47%, across 253,218 job-changing participants.

In 2007, the plan sponsor decided to act, implementing a broad program of retirement savings portability, including:

  • Illustrating the detrimental effects of cashing out, using a cashout calculator
  • Providing 1-on-1, personal assistance for all terminated participants in moving their retirement savings forward -- including consolidation of balances into existing retirement savings accounts
  • Offering expert assistance to new participants in rolling in their balances from prior employers
  • Supporting portability and consolidation for small-balance participants whose balances were subject to the plan’s automatic rollover provisions, extended in 2017 to include support for consent-based auto portability

Since 2007, the decisions of another 730,000 job-changing participants revealed that:

  • Between 2007-2012, average annual cashout leakage declined from 47% to 23.0%
  • Between 2013-2020, average annual cashout leakage further declined to 22.4%
  • Since the 2021 study, In the years 2021-2022, annual cashout leakage averaged 20.0%

At the same time cashout leakage levels were plummeting, portability and consolidation were soaring. From 2007 to 2020, over 216,000 participants consolidated their retirement savings both into and out of the plan.

Given Fidelity’s recent presentation characterizing a cashout ‘danger zone’ facing participants between the ages of 30-39, the dataset provides some intriguing results for this cohort:

  • From 2007-2016, participants ages 30-39 cashed out at an average rate of 29.6%
  • During the period 2017-2020, that declined to an average annual rate of 25.8%
  • In the last two years, 2021-2022, those figures have further declined to an annual rate of 20.7%, just slightly above the overall level of cashouts across all age groups

Clearly, portability seems to be working for this mega plan – reducing overall cashout leakage levels by 57%, vs. prior experience.

Highway Through the ‘Danger Zone’
Despite the dramatic reductions that portability facilitates, some cashout leakage seems to be inevitable in a voluntary system, where true financial emergencies will necessitate access to these savings. But perhaps the experience of our mega plan sponsor points to a cashout leakage ‘floor’ of sorts – where 20% annual leakage, vs. 40%+ leakage, could easily become the norm if sponsors and providers simply choose to act.

This, in fact, seems to be the conclusion of an author of the new leakage study, John G. Lynch, Jr., who, in a recent interview "encourages more recordkeepers to join the Portability Services Network, which would enable employees with smaller balances to roll over 401(k), 401(a), 403(b) and 457 accounts to a new employer’s plans as they change jobs." Referencing plan sponsors, Lynch pointedly states: “if the employer really cares about their employees, they should care about them when they’re on the way out the door as well.”

Indeed, if retirement savings portability is fully embraced by the industry, it may represent a much-needed highway through the ‘danger zone’ of unnecessary cashout leakage, increasing retirement security for millions of job-changing 401(k) participants.