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Retirement plan portability blog posts
First, let's review the definition of "leakage." If we think of total 401(k) savings as a bucket of water, "leakage" refers to those retirement savings that, like water in a leaky bucket, are withdrawn from the U.S. retirement system every year. There are three holes in the bucket: cash-outs at the point of job change, hardship withdrawals, and loan defaults. According to the U.S. Government Accountability Office, one of these holes is much bigger than the other two combined nearly 89% of all leakage is attributed to cash-outs that occur when a participant changes jobs. Hardship withdrawals and loan defaults together account for the remaining 11%.
On May 12th, Retirement Clearinghouse President & CEO J. Spencer Williams unveiled the Auto Portability Simulation (APS) at the Employee Benefit Research Institute's 78th Policy Forum. The APS was developed by Retirement Clearinghouse in conjunction with Dr. Ricki Ingalls, Chair of Computer Information Systems at Texas State University, and Principal at Diamond Head Associates, Inc.
The Department of Labor's much-anticipated Fiduciary Rule is ushering in many changes across the retirement services landscape, and the new rules governing the "what, how and why" for advice at the time of a participant's job change will undoubtedly transform the rollover-to-IRA market. However, a closer reading of the Fiduciary Rule sends a clear, if unstated, signal to plan sponsors, financial advisors and record-keepers' absent a compelling reason to roll over to an IRA, keep participants invested in a qualified defined contribution plan throughout their working lives.
In virtually any area of specialty, a unique jargon evolves that is highly-specific to that field. To insiders using the lingo every day, it seems familiar and perfectly normal. To outside observers, it can feel like a foreign language -- with words, terms and acronyms that make no sense.
As has happened so many times before, the Baby Boomer generation is once again drawing attention to an unmet need: a seamless way to consolidate their collection of retirement accounts into a single account, which is a necessary step to creating a sturdy retirement plan. Much has been written about how sponsors can improve both their plans' overall health and their participants' retirement outcomes by embracing roll-ins; nonetheless, the account-consolidation process remains time-consuming and expensive for most participants.
In his March 3rd column in MarketWatch, RCH President & CEO Spencer Williams establishes an important link between the board games we played as children (ex. Candy Land, Trivial Pursuit and Snakes & Ladders) and the games we can play in adulthood, while managing our retirement savings. The children's games are harmless, fun and instructive, but the adult retirement games (ex. Cashing Out, Stranding Accounts, and Not Updating Your Address) are anything but.
In a previous post, Tales from the Roll-In Front Lines, Part I, we described a roll-in transaction gone awry: a comedy of errors that occurs all too often when service providers are unfamiliar with consolidating retirement savings from one plan into another.
Have you ever wondered why so few participants move their old 401(k)s into their current employers' plans? Or why so many participants prematurely cash out their retirement savings accounts, regardless of taxes and penalties? Or why job-changing participants leave their savings behind only to lose track of them as if their assets for retirement belong on some remote desert island away from all their other savings?