This demographic, ages 24 to 32, is looking for more meaningful work, according to Williams, chief executive officer of Retirement Clearinghouse, in Charlotte, North Carolina, which is part of the issue. While previous generations came out of college with a clearer sense of where they could build a career, Millennials change jobs a little more frequently while they search for the right career path.

At the same time, the steadily increasing adoption of auto enrollment in 401(k) plans means that by the time they are 30, they might have been auto-enrolled in three accounts. “Three small account balances is not a good thing,” Williams tells PLANADVISER. The problem is that each small account (on average, the balance is $3,000) is like waving free money in front of the Millennial plan participant.

Cash-outs of course are not unique to Millennials, points out Warren Cormier, founder and president of Boston Research Group. They behave similarly to other age groups. “The reason they have a particular problem with hyperbolic discounting is that even if they change jobs because they want to, they’re into a loss aversion,” he tells PLANADVISER. This means that the loss of the job carries much more of a psychological impact than any potential future gains.

When several thousand dollars is suddenly in front of them at the time of this job loss, the emotional tendency is to reach for the cash to offset the loss a plan participant has experienced, Cormier says. 

Williams says that Millennials should be stopped from using hyperbolic discounting to minimize the importance of this sum.  Hyperbolic discounting refers to the tendency for people to increasingly choose a smaller-sooner reward over a larger-later reward as the delay occurs sooner rather than later in time. The hyperbolic discount is a term used in behavioral finance to explain how people view money or rewards: the tendency is to choose a smaller reward that comes sooner over a larger one that takes place in the future.

In other words, a small account balance that is immediately accessible is seen as more desirable or more attainable than one that will be available decades in the future, at retirement. Younger plan participants tend to see retirement as an event so distant that it may hold little meaning.

Williams says the word “incubation” resonates with some people. “What you’re trying to do is incubate the accounts,” he explains. Plan sponsors and advisers should aim to give Millennials information about the consequences of cashing out at the time of the job change, admittedly a difficult time to get their attention.

Cashing out of the plan is about the worst thing Millennials can do, Williams says. Second-worst is leaving a small balance in the previous employer’s plan, because the money is still at risk of being cashed out. “By far, 70% of the cash-outs happen within 180 days of someone changing jobs, but there is a delayed effect,” he says. “If the money is not consolidated in a new plan, it’s still at risk.” After the initial period, about 25% of cash-outs occur in months seven through 18 (5% of cash-outs take place at random).

According to Williams, at the end of a first job, a Millenial’s account balance is likely in the range of $3,000 to $6,000, assuming three years on the job with a 3% deferral rate matched at 3%. This amount could more than double after another three years if it is consolidated  and put it into the new employer’s plan, he says, assuming continued contributions, matches by the new employer, some market growth and perhaps a raise.

“We know there is a cash-out curve,” Williams says, with small amounts most likely to be cashed out and large amounts the least likely. “At $20,000, the cash-out rate drops in about half,” he says.

Using a two-punch approach, Williams explains that the first punch is asking Millennials to assess how much the cash-out will cost them. “Your $5,000 is really [worth] $3,000, because you’re going to pay taxes and penalties,” he explains. “Second punch,” he says, “is that the $5,000 is really $50,000 at retirement. For Millennials, those numbers really stand up to that age group [because of their investing time horizon].”

Using a trick of behavioral finance, Williams says that using a multiple of 10—equating $5,000 to a future $50,000—creates an aha! moment for people contemplating a cash-out. “We stop them from discounting the value of that $3,000,” he explains.

Unfortunately, the most effective way to break through the tendency to make emotional decisions is also the most expensive, Cormier feels: Direct intervention. “Put them in front of a live counselor or set them up with a phone interview,” he recommends. “That is more labor intensive. But if you leave it to rules of thumb or sending a paper document, it has less of an impact.”

Adopting a point of view that wants to prevent cash-outs can benefit everyone, Williams says. Plan sponsors might want to consider asking how many new hires come to them with an account balance of zero? Usually, the answer is 100%, he says. Wouldn’t plan sponsors be better off participating in a system where new hires came with $5,000 to place in the plan? “Plan sponsors get that in a New York second,” he says. It is to their benefit for separating employees to roll over their small-account balances into a new plan. “The balances are static, and the former employees are not going to tell you when they move.”

Williams feels that everybody loses in a cash-out: The participant, the plan sponsor, the future plan sponsor and even the plan itself, he contends. “We are involved in missionary work to help plan sponsors understand that retaining those small balances in their accounts is a problem,” he says. “A $5,000 balance is really not what they’re building those plans for.”

Plan sponsors that proactively help their separating employees roll over assets into a new plan can participate in a system that benefits everyone, Williams says. “It’s a win all the way around.”