Compliance October 28, 2009

FINRA Forms Social Networking Task Force

Rick Ketchum, chairman and CEO of the Financial Industry Regulatory Authority (FINRA), said the agency has formed a task force to examine how regulation can welcome new forms of communications while protecting investors.

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Speaking at the annual meeting of the Securities Industry and Financial Markets Association (SIFMA), Ketchum said the phenomenon of social networking is an example of new technologies that challenge abilities to ensure compliance with regulatory requirements. While social networking sites such as Facebook and LinkedIn provide new ways to inform and interact with broker/dealer customers, they also raise regulatory challenges. For instance, he noted that it is difficult for firms to archive social-networking communications.

FINRA has previously not released formal guidance about social networking, but has produced a podcast to help broker/dealers and registered representatives interpret rules in regards to social networking (see “FINRA, SEC Rules for Social Networking”). Ketchum said the new Social Networking Task Force is composed of industry participants “to explore how regulation can embrace technological advancements in ways that improve the flow of information between firms and their customers—without compromising investor protection.”

“Many registered representatives, particularly younger ones, want to use social networking sites to communicate with friends and potential customers,” said Ketchum, according to the speech transcript. “As currently constructed, these sites would not permit you to easily supervise these communications. For that reason, most firms prohibit their employees from using these sites for their business. Nevertheless, interest in these sites will not go unabated. Overcoming many of these challenges will require technology solutions. In fact, we are aware of new technologies that may soon enable firms to archive employee communications in order to comply with supervision and recordkeeping requirements.”


Data & Research October 28, 2009

Almost Half of Departing 401(k) Participants Still Cash Out

Nearly half of workers leaving their job take a 401(k) cash distribution, a Hewitt study found.

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A Hewitt Associates news release about the study said the 46% figure for 2008 has remained virtually unchanged since 2005.

The study of 170,000 401(k) participants who left their jobs in 2008 shows that the remainder either rolled over their money to a qualified IRA or other retirement plan (25%) or kept their savings in their ex-employer’s plan (29%). The 2005 study showed 45% of departing workers took a cash distribution, 23% rolled over their savings to a qualified IRA or other retirement plan, and 32% left their money in the plan.

Younger workers are more likely to cash out than their older counterparts. Sixty-percent of employees in their 20s took a cash distribution compared to 34% of those in their 50s, according to the analysis.

“Particularly during the economic downturn, employers and financial advisers have been increasingly vocal about the negative impact that cashing out of a 401(k) plan has on retirement savings,” asserted Pamela Hess, Hewitt’s director of retirement research. “But employees don’t seem to be getting the message. In a society where less than one in five workers will likely be able to meet their needs in retirement, employers and policymakers need to work together to implement solutions that change employee behaviors and reduce cash-out rates. Otherwise, millions of Americans who rely on defined contribution plans will find themselves unable to achieve a financially secure retirement.”

Hewitt pointed out that cashing out employees end up being able to access a comparatively small amount of the money because of taxes and penalties and, because of compounding, end up with a significantly smaller nest egg at retirement.

For example, an employee who cashes out $5,000 from a retirement plan at 25 may potentially be sacrificing $75,000 at retirement, yet he or she only receives a small amount— perhaps only $3,500—from the cash-out, Hewitt said.

Plan Balance Connection

According to the news release, the analysis also found a direct connection between 401(k) plan balances and cash-out rates.

Only 8% of workers with plan balances of $100,000 or more cashed out, and 17% with plan balances between $20,000 and $99,999 did so. Conversely, the number of cash-outs among employees with smaller balances is much higher. Almost half (45%) of workers with balances between $1,000 and $5,000 took a cash distribution, while 85% of those with balances under $1,000 cashed out either voluntarily or due to force-out provisions.

The Government Accountability Office (GAO) asserted in a recent study that Treasury and Labor Department regulators should encourage sponsors to provide participants with more detailed information including various financial scenarios to amply illustrate the potential negative effects on the person's ultimate retirement account balance of taking loans or accepting a final account cash-out (see “Sponsors Need To Plug Leaks for Loans, Withdrawals”).

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