Why is 401(k) Plan Leakage a Problem?
401(k) leakage is a large — and growing – problem:
- Every year, the GAO estimates that billions of dollars of retirement savings are prematurely removed from our nation’s defined contribution plans.
- Leakage studies by large recordkeepers tell a consistently grim story, including cashout levels as high as 60% at job change, depending upon the balance segment.
- EBRI estimates that, if cashout leakage were reduced by just one-half, we would add over $1.3 trillion in retirement savings in just over 10 years.
Fortunately, there are concrete, proven steps that plan sponsors can take that will not only reduce leakage, but can increase participants’ retirement readiness, streamline your plan and trim your administrative burden.
1. Recognize the big leakage problem: cashouts at job change
Plan sponsors should understand that:
- 89% of leakage comes in the form of cashouts that occur post-separation1, when job-changing Americans confront a system that makes it difficult to easily transfer their retirement savings from one plan to the next.
- This lack of portability means that cashing out is a huge temptation. Almost 2/3 of separated participants who cash out are doing so for reasons other than economic hardship2. Most participants who cash out will regret it later
- Those who don’t cash out can often leave small, stranded 401(k) balances behind.
1 – GAO, Report to the Chairman, Senate Committee on Aging, August 2009
2 – Boston Research Technologies, Actionable Insights for America’s Mobile Workforce, May 2015
So what can plan sponsors do? Let’s look first at newly-separated plan participants.
2. Don’t cash out separated plan participants with less than $1,000
It’s tempting to simply cash out these micro-balance accounts. But this approach can create a big headache with uncashed checks, over time. Uncashed distribution checks remain a plan asset, as long as they go unresolved.
Instead, consider including these participants in your automatic rollover program (see #3)
3. To minimize the “small account” problem, establish an enhanced automatic rollover program for all separated participants with less than $5,000
Ask your recordkeeper to work with an automatic rollover service provider whose enhanced standard of care includes:
- Reducing participant cashouts by 50% vs. industry averages. Specifically, your automatic rollover service provider should be able to demonstrate cashout levels of 25% or less, throughout the plan force-out process using a “cash out intervention” approach to participant communication during the force out process.
- A commitment to, and a track record of, consolidating safe harbor IRA balances into existing IRAs or back into the defined contribution system though roll-ins.
- Conforming to principles of auto portability, the emerging industry solution that will automatically move these sub-$5,000 balances forward when a safe harbor IRA accountholder’s new 401(k) plan is located.
4. Offer assistance to separated participants with greater than $5,000
Offer education so that these participants know their options, including:
- Understanding the high cost of cashing out
- Outlining the additional administrative costs of maintaining multiple retirement accounts
- Consolidating their balances to a new employer plan or an IRA, if applicable
- Staying in plan
Many plan sponsors engage an unbiased, un-conflicted roll-out service provider so that newly-separated participants not only have a range of easy options, but are not unduly “steered” into inappropriate ones.
5. Allow and encourage new & existing plan participants to roll-in their qualified funds into plan.
The incidence of cashouts decreases dramatically as participants reach a “magic threshold” of retirement savings – shown to be around $25,000. Many of your new and existing plan participants will have balances that they’ve left in previous plans, or even in IRAs.
Support roll-in contributions to your plan by:
- Ensuring that your plan allows roll-ins
- Promoting roll-in contributions with new hires and during annual enrollment periods
- Engaging a facilitated roll-in service provider to provide end-to-end assistance to participants for a modest fee, which can be paid for by the plan.
What results can my plan achieve in reducing cashout leakage?
A 2013 study by Boston Research Technologies showed that the steps recommended in this video can:
- Reduce cashouts across all balance levels by over 50%
- Reduce administrative burdens and inefficiencies resulting from high-levels of small accounts, missing participants and uncashed checks
- Increase average balances by 17%
- Improve retirement readiness and enhances participant satisfaction levels
Latest posts by Retirement Clearinghouse RCH (see all)
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- What Are Uncashed Distribution Checks and Why Should I Care? - November 23, 2016