Studies show that more than 40% of workers cash out their DC plan balances when they leave their employer. In the Spring 2015 issue of NAPA Net the Magazine, Warren Cormier explores some reasons why.
Cormier writes that, even for workers who leave on their own terms, a termination instills negative emotions, making irrational decision-making more likely. And since many plans don’t allow outgoing employees with balances under $5,000 to keep their money in the plan, many would rather take the money and run, regardless of whether they’re taking a job elsewhere or not.
“All this leads many participants to find the offer of a large lump sum of cash almost irresistible, particularly among lower-income, small-balance DC participants who value even a small amount of money in their account much more than high-income colleagues do,” Cormier notes. “The cash is an attractive offer in an emotionally turbulent time where logic is replaced by what ‘feels good’ at the moment.”
Cormier finds that, of those who cashed their plans out, most of them don’t have a specific plan for the money. While 47% report spending their balances on housing-related costs, Cormier says that this is because people plan on spending the money on whatever bills arise first, and there is usually no bigger (and more consistent) bill than the rent or mortgage.
In a study Cormier conducted with Retirement Clearinghouse featuring responses from 500 randomly selected callers who said they wanted to cash out their DC balances, nearly one in five said they would use the money for “nonessentials,” essentially forfeiting money down the road for a short-term fix.
But, in Cormier’s words, as long as it’s easier to cash a check than do anything else, and as long as Americans continue living beyond their means in a still-uncertain labor market, leakage is going to continue.
“Unless we make the best decisions the easiest to execute, other steps will be ineffective,” he advises.
To view Cormier’s full column, click here and select “The Face of Friction” from the article index. To view the full 78-page spring issue of NAPA Net the Magazine, click here.
