The discussion at a May forum on ways to reduce retirement plan leakage has been published by the Employee Benefit Research Institute.
Leakage, defined as preretirement reductions in plan savings by workers, either through loans, hardship withdrawals, or payouts at job change, is a big problem in a country whose workforce is already singularly poorly prepared to pay its way through retirement.
Related: Portable retirement solutions
Leakage is counted in the billions of dollars each year, according to the Government Accountability Office, and employers are increasingly considering ways to reduce or prevent it to ensure their workers are better prepared financially for retirement.
The Washington, D.C.-based institute said in its report that “401(k) loans, which sometimes are criticized as a significant source of retirement savings leakage, actually account for the smallest amount of pre-retirement savings loss.”
Instead, the institute cited a 2014 analysis that found that approximately two thirds of the impact of diminished retirement savings because of leakage was associated with the cashouts that sometimes occur at job change.
A simulation model presented at the forum by the Charlotte, North Carolina-based Retirement Clearinghouse concerned outcomes of “Auto Portability,” or automated and presumptive plan-to-IRA and plan-to-plan transfers of retirement savings as workers change jobs.
At the forum, J. Spencer Williams, president and CEO of Retirement Clearinghouse, said that about 12.5 million Americans with defined contribution plans, such as 401(k)s, change jobs annually. When faced with the need to choose what to do with their retirement savings — move them to the new employer’s plan, roll them over to an individual retirement account (IRA), leave them in the old plan, or take them out of the plan (which triggers a withdrawal penalty if taken before age 59½), most opt to cash out.
About 37 percent of job-changing workers cash out because they need the money, Williams said, while the remaining 63 percent take the money out of their retirement accounts because “it’s the easiest path available,” despite penalties and taxes.
Williams discussed a model developed by Retirement Clearinghouse aimed in particular at employees with small 401(k) balances ($5,000 or less, which collectively amount to about $8.8 billion a year) that would apply both a prorollover/transfer presumption and a near-automatic process that, together, is projected to reduce retirement plan leakage by 50 percent.
Retirement Clearinghouse has also released a joint study with Boston Research Technologies that advocates making a roll-in process easier, so that employees changing jobs will actually transfer, not cash out, their accounts.
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