Just 2% of all gainfully employed respondents in a recent survey said they would cash out their DC plan’s balance if they switched jobs, but in reality, 45% of all transitioning workers do so. In the Winter issue of NAPA Net the Magazine, Warren Cormier examines why so many people take the money and run.
Cormier writes that DC plans leak over $1 trillion annually from former employees who elect to cash out their account balances (and incur hefty fees and taxes), much of it from lower-balance plans held, most likely, from lower-income workers. He writes that many workers make irrational decisions like this during times of increased stress or anxiety, and few things engender those emotions the way changing a job (or being let go from one) does.
In his column, Cormier says that nothing short face-to-face communication from knowledgeable advisors can effectively dissuade stressed and irrational workers from making a cash-out decision that, according to that DCP study, 60% will come to view as a “major regret.”
Cormier suggests that companies create an “auto rollover” option, considering that DCP reported that only 10% of survey respondents who had cashed out DC plans said they did so to pay for a true emergency. He cites a large company that instituted the plan in 2007 for severed employees with 401(k) balances below $5,000.When workers left their jobs, they were given a letter inviting them to speak with a live counselor who would give them advice and make them aware of the pitfalls cashing out an account would bring them. Over the next six years, Cormier writes, the company’s cashout rate was half the national average, with just 23% of terminated employees electing to clear out their accounts.
For more analysis into the leakage problem, and the psychology behind it, read Cormier’s column here; to download the entire 68-page Winter issue of NAPA Net the Magazine, click here.