Addressing Cash-Outs May Help Improve Retirement Readiness

Retirement readiness continues to be a hot topic, and for employers, one worth paying attention to.  It’s no secret that most Americans are woefully under-saved for retirement.  Two recent Employee Benefit News articles shed light on some of the retirement preparedness challenges Americans are facing, and the urgent need for employers to address 401(k) account cash-outs.

The majority of employees (63%) don’t understand how 401(k)s work, according to ValuePenguin.  That may explain why a recent Morgan Stanley study found that 92% of employees prioritize retirement planning assistance when considering where to work.  Both studies were cited in Employee Benefit News.

The same article explored some reasons why Americans are lagging when it comes to retirement readiness:

  1. Low savings rates: Many Americans aren’t saving enough for retirement.  A significant portion of the workforce isn’t taking advantage of retirement plans, like 401(k)s, leaving them financially insecure when they retire.
  2. Financial literacy gap: Lack of understanding of how finances work contributes to poor retirement planning.  Many employees don’t fully understand the importance of retirement savings or how to optimize their investments to achieve their long-term financial goals.
  3. Over-reliance on Social Security: A significant number of retirees heavily rely on Social Security benefits as their sole source of income, which may not be sufficient to maintain their desired lifestyles.

Employers have an opportunity to educate employees about the importance of retirement planning and offer resources, such as financial wellness programs, to boost financial literacy.  Consider implementing workshops or online resources that explain the benefits of 401(k) plans and guide them in making better-informed investment decisions.

Another pitfall in Americans’ retirement readiness is the proliferation of 401(k) account cash-outs, especially in recent years.  Another Employee Benefit News article spotlighted recent research from the Sauder School of Business that found that 41.4% of employees chose to cash out their 401(k) accounts when they left their employers.  Employees often cash out their 401(k)s when facing financial emergencies or other life changes that require easy access to a sizable sum of money.  This reduces their retirement savings significantly and potentially exposes them to penalties and taxes.

The negative impact of cash-outs includes the erosion of retirement savings, as well as disrupting the power of compounding interest, which can significantly impact the amount an individual can accumulate for retirement.  The EBN article suggested auto-portability as a viable solution to improve retirement readiness in America and help retain assets in the nation’s retirement system.  Auto-portability enables employees to seamlessly transfer their 401(k) accounts from one employer’s plan to another when changing jobs, reducing the opportunity (and temptation) to cash out their savings.

Employers play a crucial role in helping employees retain their retirement savings and boosting overall retirement preparedness.  Consider auto-portability options to make it easier for employees to take their 401(k) accounts with them when switching jobs.  Additionally, provide clear information about the potential long-term impact of cash-outs and emphasize the benefits of preserving retirement savings in workplace retirement plans.

You have an opportunity to positively impact your employees’ financial future.  By addressing retirement preparedness and stemming the tide of 401(k) account cash-outs, you can help your workforce achieve a more stable retirement.  Invest in financial education and wellness programs, consider offering solutions like auto-portability, and empower your employees to make informed decisions about their retirement savings to help increase their financial security for the future.


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