To be sure, missing participants pose a significant and vexing challenge to plans, TPAs and recordkeepers. But troublesome as they are, cashouts ultimately are an even bigger issue, a service provider suggests.
Calling cashouts “orders-of-magnitude worse,” Retirement Clearinghouse’s Tom Hawkins argues in BenefitsPro that they are a problem that “silently devastates millions of Americans’ prospects for a timely or comfortable retirement every year.”
Cashouts are worse than missing participants, says Hawkins, because at least the money in missing participants’ accounts is still available, while funds in accounts that participants have cashed out is not — something he says “is intuitively obvious, but often overlooked.”
Compounding the effect, Hawkins says, is that cashouts are far more numerous than missing participants. He cites a recent study by Retirement Clearinghouse of 1,000 inactive defined contribution plan participants which found that 11.3% of terminated accounts have a “stale” address and suggests that nationwide there are about 3 million missing participants. Hawkins cites additional research which found that nearly 15 million plan participants change jobs each year, 6 million of whom cash out their accounts.
Even worse, posits Hawkins, is that only one-third of cashouts are to provide quick funds to address a “true financial emergency.” The rest are unnecessary, he says, and result from other factors, including lack of education and assistance for participants.
The answer, Hawkins argues, is to increase portability — including the introduction of auto-portability.