Why can’t 401(k) plans be more easily portable? According to Retirement Clearinghouse’s research, that’s what most participants want: the ability to roll over assets from a plan held with a former employer to the plan of their new employer. Yet cash-outs are a persistent problem when people change jobs, putting retirement savings at risk for all age groups.
Retirement Clearinghouse, which provides account portability and consolidation services, 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.
After cashing out, participants tend to regret the decision as they get older and realize the negative impact for their retirement savings. Perhaps because their savings horizon is longer, 64% of Millennials have no regrets about cashing out. But Baby Boomers (53%) and Gen X members (46%), with retirement looming or at least more in their sights, feel differently.
One problem is that plan-to-plan rollovers are far from automatic, and rolling assets into an individual retirement account (IRA) is often an easier solution, the Government Accountability Office (GAO) found in a report. Participants should be given concise, standardized information about their distribution options at the time of separation, the GAO recommended, and processes should be designed to make it easier for participants to roll assets into a new institutional plan.
Retirement plan participants are extremely receptive to using their 401(k) plans as their primary retirement accounts during their working years, says Retirement Clearinghouse, which is beginning to approach plan sponsors with an auto-option to enable new employees to more easily bring over their assets from a previous plan.
Next: What makes it so difficult to port assets from one 401(k) plan into another?
Roll-ins Are Not on Auto
The sticking point is that the current roll-in process is confusing, difficult to decipher and time-consuming. According to Warren Cormier, author of the study and chief executive of Boston Research Technologies, portability was designed into the U.S. retirement system but never fully developed or delivered.
“The resultant cost of system-wide friction is large and growing,” Cormier says. “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 change jobs, but don’t know where or how to begin the process.”
Interest in a service that rolls in account balances from a previous plan is strong. Even though Millennials express a generally low level of awareness of the impact of cash-outs, they are more receptive to consolidating retirement balances than members of older generations. Nearly three-quarters of Millennials (73%), two-thirds of Gen X (66%) and half of Baby Boomers (51%) said they’d be willing to use such a service.
But the roll-in process is surprisingly cumbersome. Most Millennials and Gen X members are willing to roll in balances from previous plans, Retirement Clearinghouse found, but the process takes much longer than they expected. Participants can expect to spend 19 hours of personal time to complete all the steps in an asset roll-in. The study also found that roll-ins took an average five to six weeks to complete. Slightly more than a quarter of participants (27%) who undertook roll-ins said the transfer took more than two months from beginning to end.
Next: A clunky process cuts into portability of retirement assets.
Participants in the study who left balances behind were asked why they didn’t roll the assets into their new employers’ plans. Twenty-two percent said they weren’t sure how to do it; 17% said roll-ins “seemed very hard to do” and another 17% said they couldn’t spare the time to complete the process.
Roll-ins could be a new tool for plan sponsors to give their participants, Retirement Clearinghouse contends. Account consolidation and roll-ins can be less confusing and time-consuming, which has the added benefit of improving participant retirement readiness. Roll-ins can be as streamlined as cash-outs. All that’s needed is a system that facilitates an automatic two-way flow of assets—into one retirement plan and out of another—but shields the participant from any complexity in the process.
The best way to curb cash-outs, which are the primary source of asset leakage in the U.S. retirement system, is for plan sponsors to fully understand the information about the underlying reasons why plan participants make their decisions. “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,” Cormier says.
Boston Research Technologies surveyed 5,000 retirement plan participants in collaboration with Retirement Clearinghouse in April to understand the behavior and psychology underlying retirement plan distribution decisions. More information about the study and its findings is available at Retirement Clearinghouse’s website.