The Retirement Monster Among Us

What is the biggest problem facing retirement investors?

  • Crummy products coated with high fees?
  • Salespeople posing as real financial advisors?
  • Owning too much company stock?

It turns out the answer is none of the above.

Cash-out leakage is the retirement monster among us.

“Premature distributions, cash-outs of retirement accounts, and defaults on loans are major sources of DC asset leakage and were responsible for outflows of nearly $80 billion in 2014,”  says Shaan Duggal, a research analyst with Boston-based Cerulli Associates. “Limiting these leaks is of the utmost importance to participants and the retirement industry.”

Godzilla is no match for the true Frankenstein of wealth destruction — retirement cash-outs.

Far too many investors pay the 10% penalty and cash out their retirement plans when they find a new job. Plugging this gap would do wonders for our nation’s retirement crisis.

Interest doesn’t accomplish much with the compound piece missing.

The mother of basketball star, Jeremy Lin, cashed-out of her retirement plan to help her son achieve NBA stardom. Unfortunately, most investors do not get anywhere near the same returns as Ms. Lin.

According to the 401KSpecialist, recent studies point to an astronomical 60% cash-out rate for smaller balance 401(k) accounts.

“Retirement Clearinghouse recently demonstrated that the actual leakage for these accounts may be as high as 89 percent when you factor in the cash-out rates of safe harbor IRAs, into which many of these accounts are swept.”

It is estimated that unnecessary fees cost retirement investors about $17 billion annually. While this number is staggering, the price of retirement leakage is exorbitant.

An EBRI analysis determined that “… slashing cash-outs by half would result in an additional $1.3 trillion in retirement savings over 10 years.”

Accomplishing this is easier than going through our dysfunctional political system to pass complicated financial reforms.

The good news is there are simple methods to address this critical issue.

The commonality to all these solutions is portability; being able to move retirement plans from one job to the next in an efficient manner. This would negate the incentive to cash-out when changing jobs.

According to the 401KSpecialist, here are some common sense ways to address the cash-out leakage issue:

  • In 2013, a Boston Research Group study revealed that a program of retirement savings portability actually reduced cash-out leakage by half.
  • Another study of America’s Mobile Workforce confirmed that only one-third of cash-out 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.

“EBRI has determined that auto portability, when applied only to the sub-$5,000 balance segment, would reduce the retirement savings shortfall by $1.5 trillion.” 

People need a “nudge” to do the right thing. Measures are needed that mandate portability. This would be the default choice when switching jobs and changing retirement plans. This simple step would make the retirement of millions more secure.

A small tweak should not require political bickering. Other than a partisan lunatic, who would object to this?

Imagine a political system that looked out for the best interests of investors?

It’s easy if you try (maybe John Lennon never had to deal with armies of financial lobbyists.)

Combining the portability standard with the fiduciary rule would create the ultimate bull market for retirement investors.

The alternative is continuing to eyeball the countdown of the ominous National Retirement Savings Clock.

Watching money burn is never a pleasant sight; especially if it’s your own.





















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