Leakage Is a Serious Problem for 401(k) Plans

Roughly one fourth of Baby Boomers cashed out their retirement savings at least once when changing jobs, and this rises to one third of Millennials and Gen X, the Defined Contribution Institutional Investment Association (DCIIA) found in a survey of 5,000 retirement plan participants.

Leakage is a serious problem for the nation’s retirement savings, as 40 cents of every dollar contributed to defined contribution (DC) accounts by savers under age 55 eventually leaks from the retirement system, DCIIA says, citing a study by the Federal Reserve Board.

About 75% of the cash-outs involved accounts with less than $20,000, suggesting that participants consider small amounts of savings not worth the effort. Among workers with more than $150,000 in retirement savings, only 23% have cashed out at least once in their lifetime.

DCIIA also found that cash-outs occur at all income levels. Among those earning more than $150,000 a year, 33% have cashed out at least once during their career. Wealth levels also affect cash-outs: 40% of workers with less than $25,000 in household retirement savings have cashed out at least once in their career.

NEXT: Many workers leave assets in a former employer’s plan

Approximately half the survey respondents leave their retirement assets in their former employer’s plan, and this is consistent across generational groups. Only 20% expressed a well-thought-out reason for leaving their money in their previous employer’s plan, however, such as preferring the investment menu or customer service.

Not knowing how to roll assets over, not having the time or not considering it a priority were each mentioned by about 20% of all generations as the barriers to moving retirement assets to a new employer’s plan. “This suggests that there is an opportunity for employers to educate new and existing employees about the ability to consolidate their prior retirement plan assets into their new plan in an effort to enhance their retirement preparedness,” DCIIA says. “Eliminating the barriers present in the rollover process would be a viable solution to plugging the leak from retirement plans.”

Cerulli recently issued a report contending that participants can be dissuaded from cashing out of their retirement plan if they receive a phone call from an adviser or are shown an illustration of lost future value. To prevent hardship loans and withdrawals, Cerulli recommends showing participants net take-home amounts after the steep fees and taxes for pre-retirement withdrawals.

As well, participants who work with an adviser are more likely to have discussed the advantages and disadvantages of a rollover (60% vs. 30%), according to the LIMRA Secure Retirement Institute.