Title: Plug the Drain: How to Avoid Losing Your Retirement Savings
Everybody knows that leaks are a problem for pipes, but did you know that billions of dollars flow out of the U.S. retirement system every year? This occurs when investors cash out their 401(k) plan accounts, which can seriously hurt their chances of building a sufficient nest egg for retirement. The issue predominantly affects job switchers, particularly those with small accounts, who often drain their accounts instead of rolling them over. Because of this, they forfeit their savings and future earnings on that money. 40% of workers who leave a job end up cashing out their 401(k) plans each year, amounting to $92.4 billion in 2015, according to the Employee Benefit Research Institute.
Research suggests that much of this loss is due to “friction”—it’s simply easier for people to take a check than to go through the multi-step process of moving their money to a new 401(k) plan or an individual retirement account. The 401(k) ecosystem could have almost $2 trillion more over a 40-year period if workers didn’t cash out their accounts, according to the Employee Benefit Research Institute. However, recent legislation, Secure 2.0 and partnerships among major 401(k) administrators, have aimed to reduce friction and prevent leaks.
An astounding 85% of workers who cash out end up depleting their 401(k), but it’s not entirely their fault. By law, employers can cash out the small account balances of former employees who leave their 401(k) accounts behind, sending them a check without the workers’ consent. Secure 2.0 disallowed this for balances of $1,000 to $5,000, and it raised that upper limit to $7,000 starting in 2024. Nevertheless, while this IRA workaround preserves more money in the retirement system, it’s an imperfect solution because assets are generally held in cash-like investments with little interest.
Fortunately, there are initiatives in place to address the 401(k) leakage issue. Auto portability is one such initiative. This automatic exchange mechanism has been implemented among the nation’s largest 401(k) administrators to stem leakage and reconnected millions of people each year with 401(k) accounts they left behind upon job change.
Moreover, a 401(k) “lost and found” is in the works, which will help workers locate old, forgotten retirement accounts. In the meantime, if you suspect you may have left behind an account, there are options to reclaim it, such as checking old records or contacting former employers or unions.
These measures and ideas are designed to address the retirement savings problem in the U.S., helping to prevent individuals from losing a significant portion of their hard-earned savings and ultimately providing them with more financial security in their retirement. So, plug the drain and take advantage of these resources to secure your retirement and ensure a brighter future.
Source link