Consolidation Corner

America is a fundamentally caring country, as reflected in the collective actions of its individuals, businesses and policymakers. In the midst of the COVID-19 crisis, no policy reflects this caring spirit more than the aptly-named CARES Act, which, among other things, temporarily allows retirement savers hard-hit by the COVID-19 crisis to tap their qualified retirement savings while avoiding the punitive, 10% early-withdrawal penalty.

It goes without saying that we are not living in normal times. The health and safety of our families and communities are paramount, and measures to ease burdens and hardships are always appreciated. These include the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the massive fiscal stimulus signed into law on March 27, 2020.

In extraordinary times like these, it is understandable that Americans need emergency cash injections to pay expenses. But before tapping their 401(k)s, workers should at least follow the advice offered by the old saying “think twice,” and consider all sources of short-term cash, before prematurely cashing out their 401(k) savings (WSJ: “The Emergency 401(k) Button,” March 20). Even if tax and other penalties on 401(k) cash-outs during this period are waived, Americans who cash out forfeit the additional savings which the sums they receive would have accrued by retirement, had they remained incubated in the U.S. retirement system.

Looking for a quick primer on how auto portability works? Watch the video below, which walks you through the four-step process, including:

1. Worker changes jobs
2. Locate new worker's account
3. Match data
4. Savings follow worker

Although defined contribution plan recordkeepers and sponsors have made considerable progress helping participants retain savings through reduced fees over the past decade, job-changing participants’ 401(k) savings account balances remain in a state of dangerous limbo, as participants often succumb to the temptation of cashing out. EBRI reports that at least 4.5 million—or 40%—of job-changing participants cash out $92.4 billion in 401(k) savings from the U.S. retirement system every year.

Increasingly, 401(k) plans have become more-and-more “institutionalized” – reflected by an increased level of sophistication in investment options, coupled with a downward trend in fees. 

Every year, our nation’s retirement system loses $92 billion in savings because 401(k) plan participants prematurely cash out their accounts when they change jobs. This is the most recent estimate from the Employee Benefit Research Institute (EBRI), and while this finding affects all American workers, minorities are hit hardest.