Retirement Accounts are Leaking

The Senate Health, Education, Labor and Pension (HELP) Committee held a hearing on Tuesday to investigate the causes, incentives, and possible remedies to workers’ withdraws and borrowing of retirement assets for non-retirement costs. There is a large percentage of American workers that are saving for retirement, but they don’t have savings for other milestone “purchases” (ie buying a home or paying for college). These non-retirement withdraws are called “leakage.”

Only two percent of savers withdraw for catastrophic need, this is “leakage”, but wouldn’t be considered as abuse of retirement savings by any reasonable measure. However, borrowing against retirement savings has a varied degree of “necessity,” and preventing the use of these accounts for non-essential borrowing should be a goal of any retirement policy. “Cash outs” during job transitions are the major culprit for mismanagement of retirement finances. Cash outs happen most often when retirement accounts have relatively small investments, leaving workers with frequent job change at a systematic disadvantage for retirement preparedness. Creating incentives to roll-over these accounts, or allowing “cashing in” these withdraws into a new retirement account should be a simple process to avoid liquidation and spending of retirement assets as a result of a job change.

Auto-enrollment, retirement education, and narrowing allowances for borrowing against retirement assets should be considered as policy remedies according to the three witnesses at the hearing. The message from the panel was that people (very generally) cannot be expected to save enough for retirement, or when they do, they cannot be expected to leave those assets alone until they retire.

Roll-over of retirement accounts is too complex. The difficulty in making these transitions is attributed as a major hurdle to preventing “cash outs” during job changes.  One solution that the witnesses, and the Senators failed to raise was the decoupling of retirement investment accounts from the employer-employee relationship, ignoring the possibility that employers could contribute to an account that is free to move with the employee from job to job for the entirety of the worker’s working life.

Dr. Fellowes of HelloWallet points out to Sen. Warren that the money in these accounts are in fact the worker’s money to use, and as long as the economic incentives are present that encourage or necessitate borrowing against retirement assets, that behavior will continue. That sentiment was bolstered by Dr. Weller’s follow-up that wait periods for these loans should be reduced, to make getting the money more timely with the perceived need.

From the evidence presented in this hearing, the one determinative conclusion the audience will take away is that American workers are financially illiterate. The need for more and better personal finance education for everyone is essential if savings rates, and responsible fiscal behavior are to be expected to combat our basic human nature that over-values consumption today, by not adequately saving for retirement later.

This post might be lacking in substantive organization, but I wrote it as I listened to the hearing, so I blame Congress.

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