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Cashouts: Plug the Leak

Say “infrastructure project” and what usually springs to mind is an overpass that has crumbling concrete with a reinforcing bar or two — yikes — visible. But a recent article takes a more expansive view of what constitutes infrastructure and the need for its repair, and argues that it includes retirement readiness as well.

In “Preventing retirement plan leakage: An infrastructure project that saves trillions,” an article appearing on BenefitsPro, Tom Hawkins argues that early cashouts — which he terms cashout leakage — from retirement plans do damage as well. Not to a bridge or a pipe, perhaps, but to infrastructure nonetheless. Hawkins calls plugging cashout leakage a “vitally-needed, national infrastructure project.”

Hawkins notes that while crumbling physical infrastructure and its repair come with a big price tag to the taxpayer, cashout leakage costs individuals. He calls it “tragic, depriving millions of hardworking Americans of a comfortable or timely retirement.” Another distinction, says Hawkins, is that not only does repairing the retirement plan infrastructure have a “negligible cost,” it could generate trillions in savings, the private sector can deliver it and it does not require expenditure of any tax revenue.

The benefits of reducing cashout leakage are “impressive,” says Hawkins, but are “mind-boggling” over a longer period. In fact, he says, the Employee Benefit Research Institute says that over 40 years plugging the leak can increase savings by a “whopping” nearly $19 trillion.

Most leakage, says Hawkins, takes place when participants change jobs and that many “simply take the path of least resistance, electing to prematurely distribute their retirement savings.” And he considers it is especially sad that they do so needlessly, citing research showing that two-thirds of participants that take early distributions had an emergency need to address.

Not only is retirement infrastructure repair not costly, Hawkins says, it also is not hard to accomplish. Among the solutions he discusses is increased portability, which he says alone would cut leakage in half.