New Retirement Research Shows Byzantine Process Leads to Harmful Behaviors
CHARLOTTE, N.C.—May 27, 2015—A groundbreaking research study finds that retirement plan participants are overwhelmingly receptive to using their 401(k) plans as their primary retirement accounts during their working years—particularly Millennials and Generation-Xers—but they find the roll-in process confusing, difficult to decipher and time-consuming. Among a host of new insights, key findings include:
- A majority of retirement plan cash-outs are unnecessary—a product of convenience rather than need.
- A large majority of separated participants intend to move their accounts from their former employers’ plans.
- A significant percentage of respondents rate employer-sponsored roll-in services as an excellent benefit.
“Portability was designed into our retirement system but never fully developed or delivered,” said Warren Cormier, author of the study and CEO of Boston Research Technologies. “The resultant cost of system-wide friction is large and growing. The research confirms something we suspected but wanted to prove, namely that cash-outs and stranded accounts trace their common roots to the fact that most participants want to keep their accounts with them when they changes jobs, but frankly, don’t know where or how to begin the process.”
The first-of-its-kind study was conducted in April 2015 to understand the behavior and psychology underlying retirement plan distribution decisions. Boston Research Technologies surveyed 5,000 retirement plan participants, in collaboration with Retirement Clearinghouse, LLC. More information about the study and its findings is available at: http://info.RCH1.com/mobileworkforce.
“Lifetime participation in plans is a critical success factor for participants of every age,” added Spencer Williams, President and CEO of Retirement Clearinghouse. “The study confirms that by helping participants make good decisions when they change jobs and assisting them with the process of moving their retirement balances forward, plans can reduce the risk of cash-outs and stranded accounts, and produce significantly better retirement outcomes for their participants.”
Cash-Outs are a Potent Threat…
Premature cash-outs of retirement accounts when changing jobs put retirement savings at risk across all age groups. The survey found that 34% of Millennials, 34% of Gen-Xers and 24% of Baby Boomers have cashed out at least one retirement account during their careers.
Participants tend to regret the decision to cash out as they age and come to understand the negative impact it has on their retirement savings. While 64% of Millennials have no regrets about cashing out, 53% of Baby Boomers and 46% of Gen-Xers feel differently.
…But Millennials and Gen-Xers are Open to Consolidating on Current Plans
However, despite Millennials’ general low level of awareness about the impact of cash-outs, they are more receptive to using their current plans to consolidate retirement balances than their older counterparts. When asked about their willingness to utilize a service provided and/or facilitated by employers to roll in previous account balances, 73% of Millennials, 66% of Gen-Xers and 51% of Baby Boomers responded in the affirmative.
Even though most Millennials and Gen-Xers are willing to roll in accounts from previous plans, the roll-in process takes much longer than they expect. On average, participants expect to spend 19 hours of personal time to complete all steps involved in rolling in assets. The study also found that roll-ins took between five and six weeks, on average, to complete—with 27% of participants who undertook roll-ins saying the transfer took more than two months from beginning to end.
Many Participants Would Roll In—If Rolling In Was as Easy as Cashing Out
When participants who left balances behind were asked why they didn’t instead roll the balances into their new employers’ plans, 22% responded, “I was not sure how to do it.” In addition, 17% said roll-ins “seemed to be very hard to do” and another 17% stated they did not have the time to complete the process.
Plan sponsors can make account consolidation and roll-ins less confusing and time-consuming, and simultaneously improve their participants’ retirement readiness. By facilitating and actively promoting the automatic two-way flow of assets into and out of their plans—shielding the complexity of the process from the participant—plan sponsors can make the roll-in as easy as the cash-out, stemming an enormous loss of retirement assets.
A New Tool for Plan Sponsors
“Understanding this study’s depth and breadth of information about the underlying reasons for why plan participants make the decisions they do is the best way to curb cash-outs—the primary source of asset leakage from the U.S. retirement system,” said Mr. Cormier. “Plan sponsors can utilize our data as a resource to identify the services they need to implement on behalf of participants, and the pinpointed messages they must disseminate to ensure different groups of participants understand the long-term benefits of account consolidation.”Back