By Renee Wilder Guerin
A 10/28/21 hearing by the U.S. Senate’s Special Committee on Aging, titled A Financially Secure Future: Building a Stronger Retirement System for All Americans, was highly-focused on the problems of cashout leakage, as well as its most promising solution, auto portability.
Appearing before the Committee, Retirement Clearinghouse (RCH) President & CEO Spencer Williams was a persuasive advocate for public policies and private-sector solutions that help preserve retirement savings for America’s mobile workforce and lower-income workers, particularly minorities.
That message found a receptive audience among Committee members, and based on the hearing, it seems clear that legislators are more focused than ever on solving these problems, and in supporting solutions such as auto portability.
In their opening remarks, Committee Chairman Sen. Bob Casey (D-PA) and Ranking Member Sen. Tim Scott (R-SC) focused on the importance of strengthening our retirement system. In his statement, Scott quickly focused on job-changing and cashout leakage, announcing a just-released report from his office: The American Dream In our Golden Years: Improving Retirement Security and Building Independence, which among other retirement savings policy positions, indicates his strong support for auto portability.
In his testimony, Williams noted the urgency in solving the problem of cashout leakage, stating: “getting people to save is job one, but right after that, the most important improvement that we can make is to help those same participants preserve their savings when changing jobs or facing career disruptions.”
Describing the magnitude of cashout leakage, Williams testified that “more than 30% of all participants and nearly 50% of minority participants cash out their retirement savings when they change jobs” and the total savings lost to cashouts “adds up to about $100 billion each year.” Williams explained that cashout leakage, in combination with the challenges participants face in moving retirement savings forward, led to the creation of auto portability, which Williams characterized as a “simple concept…that allows a person’s account to automatically follow them from one employer’s plan to the next. The idea is that if we make it easy and automatic, more people will keep their savings in a plan rather than cashing out.”
Williams offered the Committee a compelling, real-life example of the impact auto portability can have on a worker’s retirement, citing the case of Jaime Cervantes of El Paso, Texas – a healthcare worker who made two recent job changes, both resulting in the automatic transfer of small balances – two outcomes that could eventually build his 401(k) balance to more than $50,000 at retirement. System-wide, Williams noted that auto portability would result in millions of similar outcomes, generating $1.5 trillion in benefits, including $190 billion for Black Americans, according to the Employee Benefit Research Institute (EBRI).
Finally, Williams thanked lawmakers for their past support of auto portability and praised them for their “interest in legislation to help encourage system-wide adoption of auto portability” which he indicated could include “codifying into law the guidance issued by the Department of Labor” and to “create modest tax incentives to encourage early adopters of auto portability.”
Further Q&A on Auto Portability
Sen. Scott asked Williams to shed more light on who is cashing out and why, and the role auto portability could play. Scott prefaced his question by sharing a personal experience in his 20’s, when he chose to cash out a retirement savings account, resulting in a 10% tax penalty, in addition to ordinary tax rates. Extending that personal experience to our retirement system, Scott noted that “$92 billion [a year] over a decade – that’s close to a trillion dollars lost out of Americans’ retirement accounts – is a devastating impact to those retirement accounts.”
Williams responded by describing the strong, inverse relationship between account balances and the propensity to cash out, citing research from Northern Trust indicating that “a very important inflection point” occurs at $10,000, where participants’ mindsets shift from cashing out to preserving savings, adding: “we are trying to solve the problem with auto portability down at the low-end where, frankly, we need to incubate accounts and we need to make it super-easy” for small-balance savers to avoid cashing out.
In his closing remarks, Sen. Scott thanked the Chairman and other members for their spirit of bipartisanship on retirement security matters and mentioned the need to “protect auto portability” as one of his program’s key points that “should be done and must be done” to “help hard-working Americans retire comfortably.”
My key takeaway from the hearing is that there is an increasing awareness among legislators of the importance of addressing the problem of cashout leakage – particularly for under-served and under-saved segments of Americans – by embracing policies and private-sector solutions that promote retirement savings portability and consolidation, while simultaneously taking action to encourage more saving for retirement and in expanding access to workplace retirement savings plans.