Why $10,000 ‘Hurdle’ is Critical to 401k Participant Success

Crossing the balance threshold is key

401k, financial, retirement, hurdleThe first is always toughest.

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 401k 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 401k plans generates greater value, as empirical evidence has shown.

Sabrina M. Bailey is global head of retirement solutions and Gaobo Pang, Ph.D., CFA, is head of research for retirement solutions with Chicago-based Northern Trust Asset Management.

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