By Tom Hawkins
August 14th is National Financial Awareness Day, and 401(k) plan sponsors have been instrumental in increasing the financial awareness of millions of Americans by providing them with access to workplace retirement savings plans that materially enhance their prospects for a timely and comfortable retirement.
Despite their success, plan sponsors remain acutely aware of the need to promote greater financial awareness. Here are three steps 401(k) plan sponsors should consider for increasing financial awareness, while producing results that can be easily quantified.
1. Educate Participants on the Harmful Effects of Cashing Out
Plan sponsors make excellent use of behavioral dynamics in getting employees to participate, to save and to diversify. Unfortunately, these carefully cultivated behavioral virtues are fragile, and vulnerable participants can easily succumb to cashing out.
This is especially true during job transitions. Whether an employee is newly hired or recently separated, chances are they’re navigating a delicate period in their financial lives, where they’re much more likely to unnecessarily squander their retirement savings.
Each year, at least 6 million job-changing participants – around 40% of the total – will cash out completely, representing $92.4 billion in lost savings, according to EBRI. While some cashout leakage is to be expected in our voluntary 401(k) system, only about one-third of those cashouts are due to a true financial emergency based on a 2015 Boston Research Technologies study. The demographic segments that suffer the most from cashout leakage include minorities, lower-income workers, and younger age cohorts, all cashing out at much higher levels vs. the broader population.
The good news is that a little education can go a long way in helping to stem cashout leakage. Making a cashout calculator available to participants can help them understand the high cost of cashing out, even for small balances.
2. Facilitate Consolidation of Participants’ Retirement Savings
While education can go a long way in preserving retirement savings, assisting participants in consolidating their retirement savings takes savings preservation a step further. Many participants are completely unaware that they can consolidate (“roll-in”) their retirement savings into their 401(k) plans. To make matters worse, it’s typically not easy for them to consolidate balances without assistance.
But larger, consolidated balances have been linked to more responsible behaviors. A 2017 analysis revealed that, 8 years following a job change, 79.3% of participants with balances over $15,000 had managed to preserve their retirement savings, while only 32.3% with sub-$15,000 balances had retained their savings.
Plan sponsors should consider taking the following steps to facilitate roll-in awareness and utilization:
- If your plan is in the 5% of plans who don’t allow roll-in contributions, update your plan provisions to allow them.
- If you already allow plan roll-ins, promote the roll-in feature to newly enrolled participants.
- Encourage more consolidation at enrollment via a facilitated roll-in program, or following termination, through an assisted roll-out program – both of which can make the consolidation process painless for participants.
Finally, if you haven’t already, take a hard look at auto portability, the new automatic plan feature that automates the consolidation of participants’ balances subject to automatic rollover provisions.
The good news for 401(k) plan sponsors is that they also stand to benefit from increased levels of consolidation, as plans with higher average balances tend to enjoy lower average plan costs and their participants will experience the benefits of enhanced financial wellness.
3. Keep Participants Linked to Their Plan Balances
A missing participant is one who has had their plan linkage broken, and occurs because of inaccurate address information, participants becoming deceased, or, in some cases, participants who were never aware they had a plan balance to begin with.
Evidence of missing participants typically arises when routine mailings (ex. – SPDs, annual statements) are returned as undeliverable, required minimum distributions (RMDs) are not taken, or distribution checks go uncashed or are simply returned.
Fortunately, plan sponsors can be proactive and apply a variety of participant search techniques to keep participants (or their beneficiaries) linked to, and aware of, their plan balances.
Increased Awareness That Produces Real Results
Plan sponsors who follow these steps won’t simply produce more awareness in the minds of their participants, they’ll generate quantifiable results, coming in the form of decreased cashouts, higher levels of consolidation and average plan balances, as well as a lower incidence of missing participants.