401(k) Specialist Issue 2 - 2023 - 40

401(k) PROVIDER PERSPECTIVE
Cashout Leakage Alert: Highway Through
the 'Danger Zone'
By Tom Hawkins
THE 401(K) CASHOUT leakage problem is
once again in the news, with the publication
of an alarming study by academics, as well as
new data from Fidelity Investments revealing
a cashout leakage " danger zone " facing participants
between the ages of 30-39.
These studies, combined with the
mounting weight of empirical evidence
gathering for more than a decade, confirm
that 401(k) cashout leakage is a huge, persistent
problem.
Given the unanimity on cashout leakage, it
might surprise you to learn there's also equally
compelling real-world data that supports
the efficacy of retirement savings portability
in dramatically reducing unnecessary
cashout leakage. Gathered over a period of 19
years, the data reflects the ongoing post-termination
decisions of almost one million
job-changing participants, both before and
after exposure to a comprehensive program
of retirement savings portability.
The Settled Question of 401(k)
Cashout Leakage
On the question of cashout leakage, the
jury is in-the problem is bad and is not
improving.
Two recent findings confirm what we already
knew. Featured in the Harvard Business
Journal, the November 2022 study, " Cashing
Out Retirement Savings at Job Separation, "
examined 162,360 terminating participants
in 28 retirement plans, finding that 41.4%
cashed out some or all or their retirement
savings. In a 2023 EBRI webinar, Fidelity
presented data describing a 'danger zone'
for cashout leakage between the ages 30-39,
regardless of employee tenure.
These findings come on the heels of a
2019 meta-analysis by the Savings Preservation
Working Group, revealing that at least
33% and as many as 47% of plan participants
withdraw their retirement plan assets following
a job change, with the lost savings due
40
ISSUE 2 2023 | 401kSpecialist.com
253,218 job-changing participants.
In 2007, the plan sponsor decided to act,
implementing a broad program of retirement
savings portability, including:
* Illustrating the detrimental effects of cashing
out, using a cashout calculator
* Providing 1-on-1, personal assistance for
all terminated participants in moving their
retirement savings forward-including
consolidation of balances into existing
retirement savings accounts
* Offering expert assistance to new participants
in rolling in their balances from
prior employers
" On the question
of cashout leakage,
the jury is in-the
problem is bad and
is not improving. "
to cashouts amounting to $60 billion to $105
billion annually.
The Case for Retirement Savings
Portability
While the data concerning cashout
leakage is uniformly bleak, there is now
compelling evidence that retirement savings
portability could dramatically reduce
leakage by almost 60%.
These conclusions are drawn from an
extraordinary, longitudinal dataset from a
mega plan sponsor (250,000+ participants)
in the healthcare industry and covering the
period from 2002 to present, representing
the behaviors of almost one million
job-changing participants.
During the period 2002-2006, when there
was no structured program of retirement savings
portability, the plan experienced annual
cashout leakage levels averaging 47%, across
* Supporting portability and consolidation
for small-balance participants whose balances
were subject to the plan's automatic
rollover provisions, extended in 2017 to
include support for consent-based auto
portability
Since 2007, the decisions of another
730,000 job-changing participants revealed
that:
* Between 2007-2012, average annual
cashout leakage declined from 47%
to 23%
* Between 2013-2020, average annual
cashout leakage further declined to 22.4%
* Since the 2021 study, In the years
2021-2022, annual cashout leakage
averaged 20%
At the same time cashout leakage levels
were plummeting, portability and consolidation
were soaring. From 2007 to 2020, over
216,000 participants consolidated their retirement
savings both into and out of the plan.
Given Fidelity's recent presentation characterizing
a cashout " danger zone " facing
participants between the ages of 30-39, the
dataset provides some intriguing results for
this cohort:
* From 2007-2016, participants ages 30-39
cashed out at an average rate of 29.6%
* During the period 2017-2020, that declined
to an average annual rate of 25.8%

https://pubsonline.informs.org/doi/10.1287/mksc.2022.1404 https://401kspecialistmag.com/scary-number-of-millennials-say-theyll-cashout-401ks-in-market-downturn/ https://hbr.org/2023/03/too-many-employees-cash-out-their-401ks-when-leaving-a-job https://hbr.org/2023/03/too-many-employees-cash-out-their-401ks-when-leaving-a-job https://www.preservingsavings.org/_files/ugd/9fc66a_94fb03d32cbe4c10aa4bc40f5d801abf.pdf http://www.401kSpecialist.com

401(k) Specialist Issue 2 - 2023

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