Withdrawal of savings before retirement subjects workers to additional taxes & depletes savings

WASHINGTON – U.S Senator Chris Murphy (D-Conn.) joined U.S. Senator Patty Murray (D-Wash.), both members of the U.S. Senate Health, Education, Labor, and Pensions (HELP) Committee, and a bicameral group of nine Congressional Members in sending a letter to U.S. Secretary of Labor Thomas Perez to encourage the Employee Benefits Security Administration (EBSA) to issue guidance on innovations to help workers retain retirement savings between jobs. When workers change jobs, many choose to cash out their retirement savings and start over with a new savings plan at their new job. Withdrawing these savings before retirement is known as “leakage” that subjects workers to additional taxes and hampers an individual’s ability to save adequately for retirement, especially among low-wage workers. 

Financial companies have developed innovative tools to increase portability and reduce leakage by automatically transferring a worker’s 401(k) account with a balance below $5,000 from a former employer to a safe harbor IRA account. Then, once the worker has a new job, another seamless electronic transfer is made to the worker’s new 401(k) plan. The Members noted in their letter that automating this service with negative consent – where an individual must actively opt-out – could further reduce leakage. 

“[C]ashing out 401(k) accounts when an individual separates from a job has a significant and negative impact on that individual’s retirement readiness,” the Members wrote. “This small, automated action can effect a desired, positive result, and the Department should encourage such innovations to improve retirement savings and address the growing retirement crisis in this country. We encourage EBSA to work to ensure that the use of automatic portability and negative consent is prudent, and that any fees associated with such process are reasonable in its opinion.”

Read the full text of the letter here.  

The Employee Benefits Research Institute estimates that reducing leakage by 50 percent would increase retirement savings by $1.3 trillion over a 10-year period. DOL’s guidance could give financial institutions and employers clarity on the use of automatic portability and negative consent in efforts to reduce leakage, eliminate lost plans, and increase retirement savings. 

Joining Murphy and Murray in signing this letter was U.S. Senators Ron Wyden (D-Ore.), Ranking Member of the Senate Finance Committee; Claire McCaskill (D-Mo.), Ranking Member of the Senate Committee on Aging; Barbara Mikulski (D-Md.), Ranking Member of the Senate Committee on Appropriations; Al Franken (D-Minn.), Sheldon Whitehouse (D-R.I.), and Elizabeth Warren (D-Mass.), as well as Congressmen Robert C. “Bobby” Scott (D-Va.), Ranking Member of the House Education and Workforce Committee; Sander Levin (D-Mich.), Ranking Member of the House Ways and Means Committee; and Alma Adams (D-N.C.).