In his famous song My Way, Frank Sinatra memorably intoned, “Regrets, I’ve had a few …”
Taking a cue from Ol’ Blue Eyes, age brings wisdom, and those closest to retirement are more apt to acknowledge (and regret) mistakes they made when they were younger — like cashing out their retirement savings accounts — that will decrease their income after retiring.
Indeed, the majority of baby boomers who have cashed out at least one retirement savings account during their working lives regret that decision. According to a study done last year of mobile workforce behaviors conducted by Boston Research Technologies, 53% of baby boomers who have cashed out once or more regret doing so, compared to 46% of Generation-Xers and 36% of millennials who had cashed out.
Frank Sinatra crooned that he had regrets, and baby boomers aren’t shy about expressing regret over cashing out. It’s easy to see why baby boomers who have cashed out wish they hadn’t. A Fidelity Investments study from 2014 found that a hypothetical 30-year-old worker who cashes out a 401(k) account with a $16,000 balance today could lose a total of $145,000 during a 26-year retirement — approximately $471 in cash flow per month.
The rise of auto portability
Because it is the easiest option, too many hard-working Americans, and especially millennials, wind up cashing out their small (less than $5,000) 401(k) savings accounts, or leaving them behind, when changing jobs. According to the same mobile workforce study by Boston Research Technologies, 62% of participants who rolled their accounts into their current-employer plans required help to move their balances forward, and it took many weeks, if not months, of effort to do so — cashing out would have been easier.
The problem of portability friction, which causes so many participants to cash out, screams for a solution that includes an industry-wide cooperative framework for seamlessly and automatically moving workers’ retirement savings forward to their current-employer plans as they change jobs. The good news is that recent initiatives from the White House and a bicameral group of Congress members have taken us one step closer to establishing such a framework to make it easier for retirement-savers to transport their 401(k) balances from job to job as they move.
In addition, the Bipartisan Policy Center recently called for the creation of a private-sector retirement clearinghouse to reduce the leakage of assets from the U.S. retirement system by facilitating seamless plan-to-plan portability (and auto portability for account holders with balances below $5,000).
If all of the five million Americans with less than $5,000 balances who change jobs every year would forego cashing out and instead transport their savings, the U.S. retirement system as a whole would benefit tremendously. Our Auto Portability Simulation demonstrates that if auto portability is widely implemented over a 10-year period, and stays in force for a generation, then $115 billion in new retirement savings would be added to the nation’s retirement system.
In its latest industry survey, published in January of this year, the Plan Sponsor Council of America found that 97.6% of defined contribution plans are capable of accepting roll-ins of account balances from other plans. To begin the process, retirement savers can consult the human resources departments at their current employers, which may be willing to pay for all or part of the cost to facilitate roll-ins. If not, workers can also retain a roll-in service provider for a flat fee.
Going back to the regrets Frank Sinatra sang about, the first-ever survey of retirees conducted by the Transamerica Center for Retirement Studies, published earlier this year, found that 60% of retirees ended up retiring sooner than they planned — and 76% of retirees wish they had saved more for retirement on an ongoing basis.
Ol’ Blue Eyes also sang about High Hopes, but for millennials, the best path to retirement security is to follow a careful plan rather than simply hoping for the best. Millennials can ensure they don’t wind up regretting not saving enough for retirement by learning from the mistakes of their elders, and avoiding the temptation to cash out or leave their accounts behind when changing jobs.
If you’ll be in the San Francisco Bay Area at the end of July, we’d like you to join us for a special event focusing on retirement issues for women. The X Factor: Retirement Matters for Women is a free, two-part event designed to bring expert analysis and actionable information to consumers and professionals on how to plan for the best possible retirement.
On Wednesday, July 27 in San Francisco financial advisers and investors are invited to join us for an evening of cocktails and conversation about Social Security claiming strategies, tax-advantaged investments, longevity risk and more. Bob Powell will be the moderator, and our guest panelists will be Eleanor Blayney, Consumer Advocate for the Certified Financial Planners Board of Standards; Sabrina Lowell, Chief Operating Officer, Mosaic Financial Partners; and Frank Paré, President and Founder, PF Wealth Management Group. For more information or to RSVP, send an email to MarketWatchReception@wsj.com
On Thursday, July 28 at Dominican University in San Rafael, Calif., we invite women and couples to join us for a panel discussion and luncheon specifically designed to help people develop a holistic approach to retirement planning, focusing on both financial and lifestyle objectives. Our guests will come away with specific lists of essentials: must-dos and how-tos. For more information or to RSVP to this event, send an email to MarketWatchEvent@wsj.com
Both events are free and open to the public, but seating is limited and reservations are required. Please note the different email addresses for RSVPs for each event.