A new report suggests that while early distributions from retirement plans are a cross-generational issue, it may be a bigger behavioral problem than is widely appreciated.
The white paper, published by the Defined Contribution Institutional Investment Association (DCIIA), notes that while less than a fourth of Baby Boomers cashed out retirement savings at least once when changing jobs, a third of Millennials and GenXers have already done so. Not surprisingly, about 75% of the cashouts involved accounts with assets of less than $20,000. The paper’s author suggests that such small amounts might be considered not worth the effort required to roll over these assets to the new employer’s DC plan.
That said, approximately half of survey respondents reported leaving their retirement assets in their former employer’s plan, a finding consistent across generational groups. Only about 20% of all generations expressed a well-thought-out reason for leaving their money in the previous employer plan, such as preferring the prior plan’s investment menu or customer service. Asked about their intentions for their current retirement plan, 20% of Millennials reported a plan to cash them out before retirement, while only 7% of the Baby Boomer respondents reported such a plan.
As for what is leading to cashouts, the survey — based on 5,000 participant responses, and conducted by Boston Research Technologies on behalf of Retirement Clearinghouse — found that barriers such as not knowing how to roll over assets, not having time to do so, or not prioritizing the issue, were each mentioned by about 20% of all generations as reasons for not moving retirement assets to their new employer’s plan.
A potentially more worrisome trend was found in Millennials increasingly using those cashouts for non-emergency spending. Forty-two percent of Millennials reported spending retirement plan cashouts on non-emergency items such as weddings and cars, while less than 25% of GenXer respondents used the cash out for such non-emergency purposes.
Moreover, Millennials differ from older generations in their feelings toward cashouts. Of those Millennials who cashed out, only 36% reported regretting the decision, while almost half of the older generations — who are closer to the date when the financial impact of such decisions are visible — reported that regret.
These cashouts occurred even among higher income individuals, where a third of those earning more than $150,000 annually said they had cashed out at least one account during their career. However, cash outs occur more frequently among those at lower income levels: More than 4 out of 10 workers who had less than $25,000 in household retirement savings cashed out at least once in their working lifetime, compared with only 23% of workers with more than $150,000 in retirement savings.
