Perspective: Helping Your Plan Sponsors Avoid the “Cash Out″

To a plan sponsor, a terminating employee is often someone they’ve worked with for years, attended holiday parties, met their families and seen them go thorough good times and bad. Plan sponsors are also well aware of the consequences of cashing out a 401(k). Immediate taxes, fees and penalties are high, not to the mention the long-term significant loss of compound interest. Consequences aside, the number of cash outs continues to rise. According to one study, as many as 45% of people cash out their 401(k) when leaving their companies.

For your plans sponsors it’s often a heavy burden to bear, watching terminated employees sell their futures short to ease the short-term pain of leaving a job. Sponsors know that even if the terminated employee has every intention of re-investing in retirement, few will gain substantial traction in that effort.

A recent study of 395 plan sponsors¹ found that employee education and investment knowledge were among the most important services an adviser can provide. Assisting your plan sponsors in reducing cash outs affords you the opportunity to endear your firm to the plan sponsor and differentiate your practice. This can often be accomplished with little or no cost to you by partnering with a company that provides a comprehensive education and rollover program for employees in transition. In researching potential partners, it’s important you find a company that will:

• Equip participants with the tools they need to make intelligent decisions. For example, a cash-out calculator is designed to educate 401(k) plan participants who are considering cashing out their accounts. It can provide a dramatic visualization of how withdrawing a few thousand dollars today can mean having tens (or hundreds) of thousands of dollars less at retirement.
• Encourage continued retirement savings by explaining the ramifications of cashing out. Constant and repeated education is key. Because the litigation landscape has changed dramatically this year, with rulings that allow individual plan participants to sue for breach of fiduciary responsibility, it’s prudent to try to mitigate any potential claims through mailings that encourage and equip the participant to take control of their retirement.
• Extend the participants ability to speak with a knowledgeable expert to answer questions. Make sure that the company has a fully staffed retirement center (or similar) with personnel who are specially trained to help the “unadvised’ investor understand retirement options. Ensure that retirement center personnel offer independent retirement solutions and that their motivation is focused on minimizing cash-outs and keeping these participants invested in retirement.

In short, it’s all about strengthening the relationship with your plan sponsors by helping the terminated participant. The sponsor better serves their terminated employees by providing expert, unbiased education and guidance (at no cost to them). ALL participants, regardless of account size, receive the service they’re entitled to (and are less likely to cash out). And you receive the goodwill and loyalty of the plan sponsor by easing the pain they feel from the ever-increasing number of cash outs. With this approach everyone wins.

Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and as a leader in creating and building the company’s retirement income and rollover IRA lines of business.

© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be considered investment advice.

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1 “Growing a 401(k) Practice from the Inside Out,’ Fidelity Investments Institutional Services Company, Inc., March 2008

1 “Growing a 401(k) Practice from the Inside Out,’ Fidelity Investments Institutional Services Company, Inc., March 2008