According to State Street Global Advisors (SSgA) Biannual DC Investor Survey, 27% of participants ages 25 and younger cashed out their retirement plan balances upon leaving a job. This was more than twice as high as the general population’s cash-out rate, State Street said.
Research from the Employee Benefit Research Institute (EBRI) indicates young employees are more likely to cash out, in part because they do not understand how their small balances could grow if left invested in a tax-advantaged plan. In addition, 40% of these exiting participants reported that cashing out was easy.
Young employees’ lack of knowledge about the consequences of cash-outs seems to contradict their self-proclaimed knowledge about financial matters as a whole. SSgA’s research found 17% of those 25 and younger considered themselves “extremely knowledgeable” about financial matters, compared with 6% of those ages 26 to 34. Plan sponsors should be somewhat skeptical about this group’s self-assuredness, SSgA cautions.
Cash-outs are a bigger problem than loans when it comes to DC plan leakage, said Kristi Mitchem, senior managing director and head of the institutional client group for State Street Global Advisors, during SSgA’s “State of Play” media event. “Auto rollovers will be incredibly important [going forward],” she added.
State Street suggests several practices for plan sponsors who want to minimize plan leakage:
- Develop an exit worksheet that clearly defines steps for employees to take;
- Offer exiting participants a list of their choices, along with the pros and cons of each, including the impact of cash-outs on future retirement cash flows; and
- Develop specific, easy-to-understand materials for retirees and near retirees. Plan sponsors who want participants to leave balances in their plan can consider outlining the advantages associated with it (e.g. lower fees).
Overall, the plan sponsor can help participants by "making good outcomes easy, and making bad outcomes hard," Mitchem said.