The Olympic hurdles race is a thrilling event to watch, let alone trying to do it ourselves as many of us probably attempted hurdles for fun back in our school days.
Remember that first hurdle seemed insurmountable; but if you were able to clear it, you felt confident and energized into a rhythmic pace to keep going.
In retirement planning, there’s one mental hurdle in particular that appears to energize 401(k) participants: crossing the $10,000 balance threshold.
So we advocate that plan sponsors do their best to move their participants beyond the $10,000 hurdle as fast as possible.
Academic and industry analyses have captured an empirical pattern of a higher number of participants dropping out of their plans with lower balances—a reverse correlation with their account values.
The peril of having a balance as low as $1,000, for instance, is that it is likely perceived as “play money,” with a 60 percent to 84 percent cash-out rate.
Such leakage risk is reduced when the participants have gathered $5,000-plus but still remains elevated (i.e. participants could go either way). The leap to $10,000-plus makes a more noticeable difference, slashing the drop-out rate by half (compared to the $1,000 trap), therefore making it a meaningful milestone.
The significance of crossing the $10,000 hurdle is that, mentally, it triggers a stronger sense of accomplishment and thus incentivizes commitment. And economically, it forms a more solid basis to garner the tax deferral benefit.
There seems to be a self-reinforcing virtuous cycle that could lead to better participant outcomes. Look at those with $100,000+. Their likelihood to stay is up to 97 percent. Consistent participation in 401(k) plans generates greater value, as empirical evidence has shown.
Sabrina Bailey joined Fiducient Advisors as of the CEO in July 2023. Sabrina has over 20 years of financial services experience. Prior to joining Fiducient, Sabrina held several senior executive positions, most recently as Global Head of Investment & Wealth Solutions at London Stock Exchange Group plc (LSEG). Prior executive roles include serving as CEO of Emotomy and as the Global Head of Retirement Solutions at Northern Trust Asset Management. Prior to joining Northern Trust Sabrina held a variety of positions in executive leadership, management, investment consulting and manager research at Mercer, Towers Watson, RogersCasey and Arnerich Massena and Associates.
Prior to his tenure at TIAA, Dr. Pang served as Head of Quantitative Strategy at Smart USA, a global retirement technology provider. In this role, he supervised quantitative ideation and strategies in technology-enabled solutions for lifelong financial planning and investment management, led methodologies and algorithms for optimization, and built prototypes for software and platform innovations. His earlier experience includes serving as a Senior Vice President at Northern Trust Asset Management, where he led advanced analytics and developed optimal strategies within the life cycle framework, with a special focus on behavioral finance.
Dr. Pang's research contributions are notable, particularly in the realm of retirement income strategies. He co-authored a study with economist Mark Warshawsky, supported by the American Council of Life Insurers (ACLI), which found that combining systematic withdrawals with annuities can lead to better retirement income outcomes than the traditional 4% withdrawal rule. This research has influenced discussions on retirement planning, emphasizing the value of annuities in providing stable income streams.
In recognition of his scholarly work, Dr. Pang received the Best Article Award for his piece in the "Risk Management and Insurance Review" and was a finalist for the TIAA Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security.
