TRANSCRIPT:

Tom Hawkins: Welcome to another edition of the RCH Consolidation Corner Channel, where we provide you with audio content that explores key issues in the preservation and consolidation of retirement savings. In this episode, we explore the topic of 401(k) cashout leakage, which has represented a persistent problem in America’s defined contribution system. We hope you’ll find the audio enjoyable and informative.

NARRATOR: Cashout leakage represents a critical issue in America's retirement system, silently preventing millions from achieving financial security in their later years. This widespread problem deserves our immediate attention and corrective action.

Cashout leakage occurs when individuals prematurely withdraw their retirement savings after changing jobs, incurring taxes and penalties in the process.

The statistics are truly staggering -- each year, about 6 million defined contribution plan participants will cash out, compromising their prospects for a comfortable and timely retirement.

Let's examine four misconceptions that surround the cashout leakage issue.

First, cashout leakage accounts for almost 90% of all retirement plan leakage, far outpacing hardship withdrawals and loan defaults combined.

Second, contrary to popular belief, only about one-third of cashouts stem from genuine financial emergencies - the majority of cashouts could be avoided entirely, as well as the significant participant regret that eventually follows the decision to cash out.

Third, while large balance cashouts do occur, two-thirds of cashout leakage involves accounts under $7,000. In fact, addressing this small-balance problem could retain an estimated $1.6 trillion in the retirement system over 40 years.

Fourth, while studies show that 33-36% of participants cash out within a year of changing jobs ("fast leakage"), additional "slow leakage" occurs in subsequent years, pushing the total cashout rate to approximately 40%.

But why does cashout leakage persist?

Two major factors perpetuate the problem. First, cashing out is remarkably simple, while properly transferring retirement savings is needlessly complex. Second, plan sponsors often have incentives to remove small accounts from their plans, automatically cashing out balances under $1,000 and forcing out balances of separated participants between $1,000 and $7,000. Additionally, many IRA providers are reluctant to service smaller accounts, further limiting options for those with modest savings.

Finally, there is some good news concerning future prospects for addressing the cashout leakage problem. Recent initiatives include regulatory and legislative support for auto portability, the creation of the Portability Services Network (PSN), and the rapidly increasing adoption of auto portability by plan sponsors -- all factors that indicate growing momentum toward addressing this critical retirement security challenge.

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