One of my favorite financial quotes comes from Benjamin Franklin.
“Beware of little expenses; a small leak will sink a great ship,” Franklin wrote in Poor Richard’s almanac.
I usually share this advice when I encourage people to watch their spending. But the latter half of his advice — how a small leak can sink a great ship — can also apply to retirement savings. Here’s how.
When you leave a job, your employer doesn’t have to keep your 401(k) savings in its plan if it’s below a certain amount. Under the Secure 2.0 Act, your former employer can move your money out of the plan without your permission if your account is worth $7,000 or less.
No surprise that many people take the cash. Some, because they need the money. However, nearly two-thirds of people cash out their retirement accounts because of logistical headaches. They find the process to roll over the money to another retirement account so confusing or tedious that they take the cash to avoid the hassle.
This leakage amounts to significant dollars.
When you withdraw money from your retirement account, you have to pay income taxes. If you are younger than 59½, you face an additional 10 percent early-withdrawal penalty. You also miss out on the potential for that money to grow over the years.
The Employee Benefit Research Institute estimated that in 2015 alone, $92.4 billion was lost because of cash-outs. The situation represents “a serious problem that affects the potential of 401(k) plans to produce adequate income replacement in retirement,” according to EBRI.
While cashing out is a potential problem for all workers, it’s particularly troubling for Black households, where there has long been a systemic and persistent wealth gap.
The median net worth for Black households is $44,100, compared with $284,310 for White households. For every dollar of wealth a White family has, a Black family has only about 15 cents, according to the National Community Reinvestment Coalition.
According to the Urban Institute’s analysisof the Federal Reserve’s Survey of Consumer Finances, the median Black household has $39,000 in retirement savings, while the median White family has $100,000.
“Families without meaningful retirement savings are more likely to experience poverty and to depend on Social Security or safety net programs as their sole source of retirement income,” according to the Urban Institute report.
The gap in retirement wealth for Black households was weighing on Bob Johnson, founder of Black Entertainment Television. It led him to spearhead an effort to make it easier, especially for minority and low-wage workers, to roll over savings investments when changing jobs.
“It came to me that if you didn’t cash out, over a generation, it became billions of dollars staying in the pockets of Black American families,” Johnson said.
And what better way to create wealth than through the defined contribution system?
Having sold BET, Johnson is now the chairman of Retirement Clearinghouse (RCH), a financial technology organization focused on retirement savings portability. The goal is to help workers with 401(k)s and other workplace retirement accounts move their money instead of cashing out small accounts when they change jobs.
RCH has pioneered a platform that automates the transfer of an employee’s 401(k) from their former employer’s plan to their current employer’s plan.
Over the years, I’ve walked a lot of folks through the process of moving their workplace retirement accounts into rollover IRAs. It is not an easy endeavor. What Johnson is doing can be a game changer because it simplifies the movement of retirement assets.
At the hub of this process is the Portability Services Network, which has partnered with companies such as Fidelity and Vanguard that manage employer plans.
“We take data from individuals who are leaving one employer and create a mechanism whereby we could essentially search the entire industry and find their new employer plan,” said Spencer Williams, founder, president and chief executive of Retirement Clearinghouse and Portability Services Network.
As of this week, the program has helped more than 36,000 workers consolidate an old account into a new employer’s plan, with $49 million transferred since the beginning of 2024.
Both the old and new employers need to have signed up for the service. So far, more than 22,000 employers have, making automatic portability available to more than 6 million workers.
Williams said if the system is successful, and I hope it is, about $1.2 trillion could be generated over a generation.
This is a holistic approach to a problem that goes beyond people cashing out.
Over the course of a person’s lifetime, frequent job changes can mean a lot of money isn’t kept invested for retirement. Older millennials held an average of nine jobs before even reaching their late 30s, according to Bureau of Labor Statistics data.
Some workers lose momentum, which could cost them thousands of dollars in retirement earnings.
When people move to a new job, their savings rates often go down, even though they may be getting an income boost, according to Fiona Greig, Vanguard global head of investor research and policy.
A worker could be joining a plan that doesn’t auto-enroll them in the 401(k) or one with a low auto-enrollment savings rate, Greig said.
When workers switch jobs, they often unintentionally reduce their savings rate. Even if they were contributing a high percentage at their old job, they might end up at a new employer’s lower default rate of just 3 percent. This usually happens because they either delay updating their paperwork or simply get used to the higher take-home pay.
There is another hidden risk: Your investment strategy can change without you realizing it.
When a former employer moves your 401(k) into an IRA because your balance is under $7,000, the funds are often placed in very low-risk, low-return accounts, such as money market accounts or CDs. If the money sits there for years, you lose out on the compounding returns you would have earned in a higher-yielding, more diversified fund.
As Greig pointed out, this shift can be a silent setback to your long-term goals.
“Many times when people switch jobs, they move money out of the 401(k) into an IRA,” she said. “So they may be preserving the money for retirement, but actually, it’s gone from being invested in a target date fund to [being] invested in cash, in a money-market account.”
Vanguard supports the RCH solution, she said, because there is a lot of work to do to strengthen the seams in our retirement system. This is the kind of effort that will make the bucket less leaky.
A lot of the wins in retirement savings are being “unraveled” each and every time people switch jobs, and this is disproportionately impacting lower-income workers, she said.
“Sometimes people need the money when they’re in between jobs,” she said. “But I think some of this leakage is employer induced. It’s system induced.”
Every employer with a defined contribution plan should join this effort. It’s a win-win for everyone.
Employers don’t have to sweat about small accounts; workers moving to a new job can see their money continue to be invested and grow, and plan administrators won’t see spillage from the money they manage.
The two entities — RCH and PSN — act as middlemen in this process. It’s not a mandatory system either. At any point, a worker can opt to cash out.
This isn’t just about convenience. It’s a brilliant plan that can help create legacy wealth for so many families.
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