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Cashing out when changing jobs, not taking loans, diminishes savings most
When workers take out take out loans from their retirement plans, make hardship withdrawals or cash out when they change jobs, they create "leaks" that drain away their retirement savings.
Experts met recently at a forum in Washington, D.C., hosted by the nonprofit Employee Benefit Research Institute (EBRI), to discuss ways to counter this leakage. As summarized in the
August issue of
EBRI Notes, presenters made these key points:
A New Approach
As workers change jobs, automated transfers of retirement savings from their 401(k) plan to an individual retirement account (IRA) or to their new employer's 401(k) plan could significantly reduce leakage, according to
a presentation at the forum.
J. Spencer Williams, president and CEO of the Retirement Clearinghouse (RCH), a Charlotte, N.C.-based provider of portability services for plan sponsors, noted that about 12.5 million Americans with defined contribution plans change jobs each year—and approximately 5 million of them have retirement accounts with less than $5,000. They face the decision of what to do with their retirement savings. Based on his analysis of data from EBRI and other sources:
"We know from behavioral studies that this population of job changers, particularly with very small balances, is inert. They really don't respond" to education efforts aimed at retirement plan participants, Williams said. Instead, "they cash out."
But just as automatic enrollment has increased plan participation rates by requiring employees to proactively opt out if they don't want to participate in the plan, so too could "auto portability" help solve the problem of employees cashing out when changing jobs, Williams said.
The essence of the auto portability approach, he explained, is to create a mechanism of electronic records-matching for individuals between their former employer's retirement plan and the new employer's plan so that their retirement savings are automatically transferred.
Two major technical problems with auto portability have been achieving cooperation among 401(k) recordkeepers and getting the U.S. Department of Labor to agree with the "negative consent" provision, under which employers presume the participant wants to transfer funds, unless the participant actively chooses to withdraw the funds, he said.
Williams noted that "this is not just a concept," as auto portability is currently being provided to employers that are RCH plan sponsor clients. These organizations allow new hires to opt out but otherwise seek to have the employees' 401(k) account balances from their former employer transferred into the new plan.
Of the 1,500 retirement plan participants whose accounts have been automatically transferred, "the measured average account balance in the [new] employer plan increases by about 45 percent," Williams said. "By creating this default path, we incubate those savings accounts."
A June 2016 report by the Bipartisan Policy Center, a Washington, D.C.-based nonprofit policy institute, recommended adopting processes that enable the seamless transfer of retirement savings between defined contribution plans when participants change jobs. The report,
Securing Our Financial Future, noted that these solutions can increase retirement savings by reducing cash-outs and early withdrawals by plan participants, "who are most vulnerable to making these destructive decisions at the point of job-change."
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