"Reducing Retirement Savings Leakage"
EBRI Notes, Vol. 37, No. 9 (August 2016)
STEPHEN BLAKELY, Employee Benefit Research Institute (EBRI)
Email: BLAKELY@EBRI.ORG
This paper summarizes discussion on new ways to reduce retirement plan “leakage,” presented at the Employee Benefit Research Institute’s 78th policy forum in Washington, DC, on May 12, 2016.
A recurring issue with defined contribution (DC) savings plans such as the 401(k) is the risk of “leakage” -- pre-retirement reductions in plan savings by workers, either through loans, hardship withdrawals, or payouts at job change. There have been widely varying estimates of how big of a problem leakage actually is, and what the potential reactions may be by both retirement plan sponsors and participants if new pre-retirement access restrictions were imposed. For instance, for many workers the option of being able to take a loan from their 401(k) account is seen as a major incentive for them to participate. A 2014 analysis by EBRI found that approximately two-thirds of the impact of diminished retirement savings due to leakage was associated with the cashouts that sometimes occur at job change. Others have pointed out that 401(k) loans, which sometimes are criticized as a significant source of retirement savings leakage, actually account for the smallest amount of pre-retirement savings loss.
To highlight new work on leakage, the Employee Benefit Research Institute (EBRI) devoted part of its 78th policy forum to the topic of “Retirement Challenges and Reforms,” focusing in particular on “Reducing Leakage and Incubating Savings.” The May 12 event in Washington, DC, brought together about a hundred benefits-related experts to discuss a variety of retirement and health topics. The leakage-focused session involved the presentation of a simulation model by the Retirement Clearinghouse (RCH) concerning outcomes of “Auto Portability,” or automated and presumptive plan-to-IRA and plan-to-plan transfers of retirement savings as workers change jobs. Based on research and actual experience with employers, RCH has developed a fairly simple engagement model with both incoming and departing employees -- aimed in particular at those with small 401(k) balances ($5,000 or less, which collectively amount to about $8.8 billion a year) -- that would apply both a pro-rollover/transfer presumption and a near-automatic process that, together, is projected to reduce retirement plan leakage by 50 percent. It was noted that “Auto Portability” has an opt-out mechanism so that individuals can opt out if they need the money.
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3 comments:
A couple of months ago someone pointed me to Figure B-7 (p 161) of this report, B-7 (p 161), http://www.brookings.edu/~/media/Research/Files/Reports/2016/01/life-expectancy-gaps-promise-social-security/BosworthBurtlessZhang_retirementinequalitylongevity_012815.pdf?la=en
It indicates a nearly 50 percent drop in annual earnings from age 44 to age 60. Perhaps we need to be more concerned about earnings leakage than savings leakage?
Note that this seems restricted to average or above-average earning workers, so a good question is what's driving it. When you get into the late 50s you get a lot of voluntary drop-outs from the labor force; in effect, early retirements. If you look in the CPS, most of these people who've dropped out say they don't want to work. One thing to look at would be the earnings path of people who remain in the workforce until 62; do they see the decline, or is the decline a function of people dropping out. Very interesting, though.
"is the decline a function of people dropping out"
I had the same question. It does not fit (what I thought I understood of) the stylized worker models I have seen presented in papers I have read. Nor does it fit the stereotype of the hard driven high earners who work into their 60s. It fits with a reality in which reducing the ability of workers access to their retirement would be a bad thing.
(I started a 72T at age 55 when my wages took a sudden drop. I thought my case was atypical, but perhaps not so much.)
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