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Leaks aren’t just a problem for pipes.
Billions of dollars a year drip from the U.S. retirement system when investors cash out their 401(k) plan accounts, potentially crippling their odds of growing an adequate nest egg.
The issue largely affects job switchers — especially those with small accounts — who often drain their accounts instead of rolling them over. They forfeit their savings and future earnings on that money.
About 40% of workers who leave a job cash out their 401(k) plans each year, according to the Employee Benefit Research Institute. Such “leakages” amounted to $92.4 billion in 2015, according to the group’s most recent data.
Research suggests much of that loss is attributable to “friction” — it’s easier for people to take a check than go through the multistep process of moving their money to their new 401(k) plan or an individual retirement account.
The 401(k) ecosystem would have almost $2 trillion more over a 40-year period if workers didn’t cash out their accounts, EBRI estimated.
However, recent legislation — Secure 2.0 — and partnerships among some of the nation’s largest 401(k) administrators have coalesced to help reduce friction and plug existing leaks, experts said.
The movement “has really gained momentum in the last few years,” said Craig Copeland, EBRI’s director of wealth benefits research. “If you can keep [the money] there without it leaking, it will help more people have more money when they retire.”
85% of workers who cash out drain their 401(k)
U.S. policy has many mechanisms to try to keep money in the tax-preferred retirement system.
For example, savers who withdraw money before age 59½ must generally pay a 10% tax penalty in addition to any income tax. There are also few ways for workers to access 401(k) savings before retirement, such as loans or hardship withdrawals, which are also technically sources of leakage.
But job change is another access point, and one that concerns policymakers: At that…
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