On May 12th, Retirement Clearinghouse announced the National Retirement Savings Cashout Clock, a virtual clock that calculates 2017 year-to-date cashout leakage from America’s defined contribution system in real time.
When it was announced, the Cashout Clock had already registered $24.4 billion in cashouts.
Since then, the Cashout Clock has relentlessly advanced, adding another $16 billion to cross the $40 billion mark in late July. As of this writing, $42.3 billion in cashouts have occurred thus far in 2017. If nothing happens to stem the flow, then we’ll reach $68 billion in cashouts by year’s end.
Putting Cashout Leakage into Perspective
As a relative newcomer to the retirement services industry, I’m continually amazed that the cashout leakage problem (as represented by the Cashout Clock) has never been effectively addressed, adequately acknowledged or even completely understood.
When attending industry conferences, there’s lots of discussion about topics such as participant education, financial wellness, plan design, retirement income solutions and so forth. While these are important topics to be sure, there’s hardly a word about the scourge of cashout leakage, and how it works to massively undermine every one of these initiatives. Even the conversations taking place on leakage address only the tip of the leakage iceberg – loan defaults and hardship withdrawals – and not its vast, hidden underbelly: cashouts. This was made clear in a 2009 GAO report, which illustrated that premature cashouts represented 89% of all retirement plan leakage.
Then there is the fiduciary rule. Everyone – from pundits to policymakers to plan sponsors, and of course, almost every provider has been pre-occupied with the fiduciary rule for years. And while eliminating conflicts of interest is a worthy goal, proponents of the measure have most-optimistically estimated its potential benefits at $17 billion per year.
Solving cashout leakage is not only easier than eliminating conflicts of interest, it delivers much more in the way of tangible, measurable benefits. Going back to 2012, an initial analysis by EBRI indicated that slashing cashouts by half would result in an additional $1.3 trillion in retirement savings, over 10 years.
Since 2012, we’ve learned a lot more about how to address the cashout leakage problem:
- In 2013, a Boston Research Group study revealed that a program of retirement savings portability actually reduced cashout leakage by half.
- Another study of America’s Mobile Workforce confirmed that only 1/3 of cashout leakage is driven by financial hardship, and that participants would choose the “easy option” of cashing out, but were reluctant to endure the headaches associated with “do-it-yourself” portability.
- Using EBRI data, the Auto Portability Simulation modeled millions of individual choices, revealing that 2.9 million small-balance job-changers’ retirement savings could be preserved each year, if their balances were simply moved forward at job change.
Incorporating this new information, a 2017 EBRI model determined that auto portability, when applied only to the sub-$5,000 balance segment, would reduce the Retirement Savings Shortfall (RSS) by $1.5 trillion. The new EBRI estimate is important to understand, because it only counts the reductions in cashout leakage that apply to households falling short of the model’s threshold for retirement savings.
Let’s Finally Stop the Cashout Clock
Much like the National Debt Clock, the National Retirement Savings Cashout Clock is meant to draw attention to a serious, ongoing problem that requires action.
But unlike the national debt, solving cashout leakage is something that, with the support of policymakers, can quickly be addressed by the private sector within the framework of auto portability.
Let’s get going, and stop the clock!