In 1989, New York real estate developer Seymour Durst wanted to highlight America’s rising national debt, and came up with an idea: the National Debt Clock. Since then, the National Debt Clock has had a physical presence as a billboard near Times Square, serving as a constant reminder to Americans of their government’s ever-growing debt.
In the same spirit as Seymour Durst, Retirement Clearinghouse has now launched a National Retirement Savings Cash Out Clock. While it’s not an actual billboard, this virtual clock calculates 2017 year-to-date cash out leakage from our 401(k) system, highlighting the ongoing problem of cash out leakage in real time.
As of May 12th, the clock indicates that total cash out leakage for 2017 has reached $24.4 billion. If no action is taken to stem this outflow of funds, cash out leakage will eventually reach $68 billion by year’s end.
Our Cash Out Clock Starts Ticking with Job Turnover
Job-changing, or turnover, is the first key to understanding the cash out leakage problem. It’s no secret that the American worker is highly-mobile, and there’s a plethora of data available from sources such as the Bureau of Labor Statistics or the U.S. Census Bureau that speaks to this.
However, data from the Employee Benefit Retirement Institute (EBRI) provides highly-accurate information on job-changing within America’s defined contribution system. Utilizing a database of over 25 million participants, the EBRI data reveals that approximately 14.8 million, or roughly 22% of all active & contributing defined contribution participants, will change jobs each year.
Applying the results of major recordkeeper cash out studies, we find that 6 million participants, or 41% of these job-changers, will cash out completely.
This data further allows us to estimate cash outs that are occurring at various balance levels. Not surprisingly, we find that 4 million participants who cash out will have a balance of less than $5,000.
Importantly, other studies by Ariel / Aon Hewitt and Vanguard indicate that that the participants most-affected by cash out leakage include younger age groups, lower income segments, women and minorities.
The Solution to Cash Out Leakage: Retirement Savings Portability
A statistic that may surprise many is that most of these cash outs could be easily prevented.
A 2015 survey by Boston Research Technologies of America’s mobile workforce determined that only 37% of these cash outs were for economic emergencies, where a participant had an urgent need for funds. 63% of the cash outs were made for various, discretionary reasons, simply because taking a distribution (including the payment of penalties and taxes) was the easiest action to take. The study further demonstrated that removing the systemic “frictions” and providing retirement savings portability could easily prevent these unnecessary cashouts.
We’re hopeful that the National Retirement Savings Cash Out Clock will serve to focus more attention on the problem of cash out leakage and encourage all parties, including policymakers, service providers and plan sponsors to take steps to facilitate retirement savings portability, including supporting Auto Portability.
The clock is ticking on America’s retirement security.