Friction is causing leakage which continues to hurt 401(k) participants, and it disproportionality affects those least prepared for retirement.
A new research brief by the Defined Contribution Institutional Investment Association (DCIIA) argues that plan leakage from cash outs in 401(k)s remains an issue, one that undermines “the goal of preserving assets for retirement savings, compromising the ability of current workers to create an adequate income in retirement.”
The brief notes the phenomenon has a greater impact on those workers who are least prepared for retirement, citing a recent Federal Reserve Board study showing that, of those who “cashed out” due to a change in employment, 41 percent had less than $25,000 in household retirement savings.
“Cash outs remain a worrisome trend particularly for both younger generations and those at lower wealth levels, who have used the money for non-emergency spending,” Lew Minsky, president and CEO of DCIIA, said in a statement.
DCIIA’s brief also references the results of a survey conducted by the Boston Research Technologies on behalf of the Retirement Clearinghouse, which found that 34 percent of millennials reported to have cashed out at least once previously, 64 percent of whom reported that they did not regret their decision.
As to reasons for not moving retirement assets to a new employer’s plan, frictions, such as not knowing how to roll over assets, not having time to do so, and not prioritizing the issue were each mentioned by about 20 percent of all generations, according to the survey’s findings.
“This suggests there is an opportunity for plan sponsors to help educate their workers on the importance of saving and to work together to simplify the roll over process,” Minsky further added.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
