By Spencer Williams
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.
An estimated 5.9 million women participants in defined contribution plans will change jobs each year, and 41% (2.4 million) of them will cash out $28 billion in retirement savings, incurring penalties and taxes. These findings, and the one mentioned at the beginning of this article, are based on industry research on cash-out leakage, participant turnover rates, and women’s participation in defined contribution plans, as well as the Employee Benefit Research Institute (EBRI)/Investment Company Institute (ICI) 401(k) Database, the EBRI Retirement Security Projection Model®, and our Auto Portability Simulation (APS).
However, another finding indicates that women participants who have sub-$5,000 401(k) savings balances are at higher risk of cashing out upon changing jobs than their male counterparts. According to “Manual Portability and the Mobile Workforce,” the 2015 study on mobile workforce behaviors authored by Boston Research Technologies CEO Warren Cormier, women participants of all ages are more likely than men to prematurely cash out 401(k) account balances which are below $5,000—and the lower the 401(k) savings, the higher the probability. For example, women Generation-Xers are 30% more likely to cash out a $500 balance, and 19% more likely to cash out a $2,500 balance. Baby Boomer women, however, are 93% more likely than male counterparts to cash out a $500 401(k) balance!
Thankfully, research also demonstrates that the implementation of auto portability—the routine, standardized, and automated movement of a plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan—can help women participants avoid cashing out and save more for retirement. Our analysis indicates that preserving just one $5,000 401(k) balance at age 25 can result in $70,000 in savings upon retirement—and preserving three $5,000 401(k) balances over the length of a participant’s working life can generate an additional $123,600 in retirement savings.
Putting Women on Par with Men to Achieve Financial Wellness
For a variety of reasons, women have to work harder than men to save for a financially secure retirement, and obtain overall financial wellness. According to the “Women & Financial Wellness: Beyond the Bottom Line,” a recent study conducted by Merrill Lynch in partnership with Age Wave, 42% of women fear they will run out of money by the time they turn 80. Due to career interruptions such as caring for children, parents, or spouses, the average woman may, upon reaching retirement age, have earned a total of $1.055 million less than a man who has continuously stayed in the workforce.
Sponsors can take the initiative to help women participants save more for retirement, and potentially increase their standing with regulators, by encouraging and facilitating account consolidation, including the adoption of auto portability for small balances. As written in this column earlier this year, consolidation is the key to reducing missing participants through removing redundant accounts from the retirement system. Approximately 67% of stale address records for lost/missing participants can be matched up to active address records in plan record-keepers’ records, according to Mr. Cormier’s recently published study, “The Mobile Workforce’s Missing Participant Problem.” Furthermore, Mr. Cormier’s study found that the address of record in a current employer’s plan is reliable at least 92.6% of the time.
With auto portability having been in operation for nearly a whole year, this solution has a viable track record of helping plan sponsors reduce missing participants and small accounts—and women participants can benefit just as much, if not more so, than their male counterparts.
By making it easier for women participants to preserve their 401(k) savings in the retirement system, and/or consolidate their 401(k) savings as they change jobs, auto portability can help women preserve more of their retirement savings, which will help make up the shortfall described in the Merrill Lynch/Age Wage study. Using the findings from our APS, under a scenario where auto portability is broadly adopted and stays in force for a generation, every year more than a million women participants would be able to preserve their 401(k) savings in the U.S. retirement system at the point of job-change. By the end of that scenario’s time period, 42 million women participants would have preserved $365 billion in retirement savings, measured in today’s dollars.
Auto portability can position millions of hardworking American women to achieve better retirement outcomes. It’s up to plan sponsors to offer the tools and guidance to help women participants consolidate their 401(k) savings, and avoid cashing out, throughout their working lives.