American workers who cash out their retirement accounts when they leave their jobs are jeopardizing their future retirement security – a situation that could be exacerbated by a new regulation being considered by the U.S. Department of Labor (DOL) to expand fiduciary status. A study released today by Quantria Strategies reveals that the new regulation could reduce retirement savings by 20 to 40 percent for affected individuals, costing Americans between $20 and $32 billion in annual retirement savings.
The study found that those most likely to cash out their retirement savings are low-wage workers, those with low account balances, and workers under 30. High cash-out rates are also an issue for African-Americans and Hispanics.
The DOL is expected to issue a proposed fiduciary regulation later this year that would effectively prohibit many financial professionals from providing workers with education and guidance regarding the options available to them when they leave their jobs. Without this guidance, many workers may jeopardize their retirement security by cashing out their retirement savings at this critical point.
“Financial illiteracy increases Americans’ risk of bad decisions at what we know to be key ‘choke points’ in the retirement savings process,” according to Quantria Strategies. “A critical choke point is job-change time. The evidence reveals that when individuals -- particularly those with lower financial literacy -- have a financial professional’s help at job-change time, they are much more likely to do what benefits their long-term financial health: keep their money invested in a retirement savings vehicle rather than cash out and leave nothing for retirement.”
One company cited in the report found that speaking with a financial representative can make departing employees 3.2 times less likely to cash out their retirement savings, thus demonstrating the very substantial role that financial representatives can play in enhancing retirement security.
“Any regulation that limits an individual’s access to investment information when leaving a job could have a substantially adverse impact on retirement savings, reducing those savings by as much as 40 percent for affected individuals,” said Judy Xanthopoulos at Quantria Strategies. “When you’re looking at $100,000 in retirement savings versus $167,000, it makes a big difference.”
This report was commissioned by Davis & Harman LLP on behalf of a coalition of financial services organizations that provide retirement services to millions of Americans. Kent Mason of Davis & Harman is available to discuss the policy implications of this study, including with respect to the new fiduciary regulation being considered by the DOL: firstname.lastname@example.org and 202-662-2288.
The full report is available to download here.
With extensive experience providing nonpartisan support to Congress on revenue legislation, the partners of Quantria Strategies, LLC, provide independent and unbiased data-intensive analysis of difficult policy questions, with specific expertise in tax, health, and pension policy. Emphasizing a comprehensive approach to policy analysis, Quantria’s computer models answer questions relating to aggregate economic impacts (macroeconomic), distributional analysis (micro simulation), long-run demographic implications (dynamic micro simulation), and uncertainty (risk and portfolio).
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