A growing and sometimes forgotten issue with defined contribution (DC) plans is when plan participants cash out, known as leakage. A recent report by DCIIA (Defined Contribution Institutional Investment Association) and recent research sponsored by the Retirement Clearing House reviews the issues presented, which is a serious problem as the Federal Reserve estimates 40% of every dollar invested in a DC plan by workers under 55 years old cash out their DC plan.
The issue is especially acute because not only do these workers have to pay the taxes, there is a penalty as well. And though a greater percentage younger workers are likely to cash out, 25% of Baby Boomers have also done so at least once. Though lower income workers and those with lower account balances are more likely to cash out, 33% of people earning more than $150,000 have cashed out at least once. Perhaps because they are so far from retirement, fewer younger workers regret cashing out and many use the money for non-emergency expenses like buying a new car.
Over half of the DC participants leave their money in their previous plan and only 20% have a well thought out plan about rolling over their assets. If the new DOL conflict of interest rule goes through, which is likely, then many workers will have less access to advice from an independent financial advisor, even the one working on the worker’s current DC plan.
But there is an opportunity for employers sponsoring a DC plan. With help from their record keeper, participants can be encouraged to roll in all assets from disparate IRAs and DC plans from former employers. The benefit beyond helping employees who will undoubtedly be more productive if financial stress is reduced as well as being better prepared for retirement when the time is right, more assets in the plan means better service and pricing which many companies are starting to realize. The key to effectively managing roll ins and assets of workers separated from service is having the right record keeper who can manage the process and communications with retirees.
