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Cashout leakage, a long-standing problem in America’s defined contribution system, is a silent crisis that unnecessarily robs millions of Americans of a comfortable, timely or secure retirement.  Plagued by misunderstanding and neglect, it’s vitally important to understand the problem and to take decisive action to curb it.  The third of a five-part series, this article addresses the magnitude of the 401(k) cashout leakage problem.

Cashout leakage, a long-standing problem in America’s defined contribution system, is a silent crisis that unnecessarily robs millions of Americans of a comfortable, timely or secure retirement.  Plagued by misunderstanding and neglect, it’s vitally important to understand the problem and to take decisive action to curb it.

Cashout leakage, a long-standing problem in America’s defined contribution system, is a silent crisis that unnecessarily robs millions of Americans of a comfortable, timely or secure retirement.  Plagued by misunderstanding and neglect, it’s vitally important to understand the problem and to take decisive action to curb it.

The first of a five-part series, this article addresses the fundamentals of cashout leakage.

When auto enrollment was widely adopted under the Pension Protection Act of 2006, it was a well-intentioned idea for helping Americans save more for retirement.

But in this case, what seemed like the perfect recipe for increasing retirement savings for hardworking Americans was missing a key ingredient.

A primary responsibility for fiduciaries is to seek out and identify the best available solutions that enable fulfillment of their responsibilities. For plan sponsors tasked with implementing and evaluating the effectiveness of their missing participant program, this can be a difficult task, particularly given the accelerating rate of technological innovation and the virtual explosion of new sources of data available online. In today’s day and age, what is considered a state-of-the-art program today could easily become obsolete tomorrow, rendering a plan’s missing-participant program vulnerable to fiduciary liability. 

It was the best of times, it was the worst of times. 

For job-changing 401(k) participants with balances greater than $15,000, it was the spring of financial wellness, as the bulk of their retirement savings would remain intact.  For less-aristocratic 401(k) savers with balances below $15,000, it was the winter of despair, as most of their savings would be lost on the cashout chopping block or forcibly exiled to a safe harbor IRA, where more savings would perish.

Although the 401(k) is today the primary retirement-savings vehicle for many hardworking Americans, it can be easy to forget that the 401(k) is still a relatively new phenomenon.

If current trends continue, approximately 104 million women will cash out almost $800 billion in retirement savings, in today’s dollars, over the next generation.

This eye-popping statistic, presented at a “Women and Retirement Income” roundtable discussion on May 22 sponsored by the Women’s Institute for a Secure Retirement (WISER), underscores the importance of financial wellness initiatives by plan sponsors to help women participants avoid cash-outs and instead preserve their 401(k) savings in the retirement system.

Much has been written recently about the preponderance of lost and missing participants. This predicament, one of the many offshoots of the problem of too many small accounts, is an urgent one for sponsors to address given reports that the Department of Labor (DOL) is focusing on their ability to locate missing participants during plan audits.