Consolidation Corner

French author and poet Victor Hugo observed: “nothing is more powerful than an idea whose time has come.”

In theory at least, plan-to-plan portability has always been a feature of our 401(k) system. In practice, it’s been completely impractical for all but a hardy few. The idea of automating 401(k) portability was the holy grail, a ‘moonshot’ generally believed to be impossible…until now.

During the COVID-19 crisis, massive job losses combined with economic hardship and relaxed restrictions on withdrawals have created the conditions for a perfect storm of 401(k) cashout leakage. Unfortunately, this storm may soon gain more strength, when a surge in end-of-year 401(k) plan terminations could trigger a new flood of cashouts, as participants are forced to leave their former employers’ plans.

Researchers realize that long-term retirement planning is not a natural act for most 401(k) plan participants. Consequently, important 401(k) plan features have evolved (ex. – auto enrollment, auto escalation, QDIA funds, etc.) to overcome the mis-match and to promote saving for retirement. Many of these features work spectacularly well – but only for as long as participants are actively participating in that plan.

I often write about the phenomenon of cashout leakage, which occurs when participants change jobs and prematurely withdraw their retirement savings, prior to normal retirement age.

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.

When the dust finally settles from the COVID-19 pandemic, it’s a cinch that the nation’s retirement deficit will have widened significantly, due in large measure to a flood of 401(k) cashout leakage, which will increase significantly as a result of the crisis.
 

In a press release issued Tuesday, July 14th, Retirement Clearinghouse (RCH) announced that Alight Solutions will lead the nationwide launch of the RCH Auto Portability program. 

I write a lot about 401(k) cashout leakage, and I can assure you that counts for nothing around my dinner table or at cocktail parties. The topic, though, is a serious one, adversely affecting the retirement prospects of millions of Americans.

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.

The COVID-19 crisis has taught many painful lessons – but perhaps none more important than the need to protect those who are most vulnerable to the pandemic’s ill effects.