Planning, saving and investing for retirement has always been full of unknowns and these days, retirement plan participants and sponsors alike find themselves particularly bleary eyed. Experts encourage plan sponsors to try focusing on three areas where they can really make a difference.
Three Areas of Action
According to Tom Hawkins a Senior Vice President at Retirement Clearinghouse, plan sponsors can produce quantifiable results like “decreased cash-outs, higher levels of consolidation, and average plan balances, as well as a lower incidence of missing participants,” by focusing on these three areas of action:
No. 1. Educate participants on the harm of cashing out
No. 2. Facilitate consolidation of participants’ retirement savings
No. 3. Keep participants linked to their plan balances
Results against these actions turn out to be great for everyone involved. For one thing, curbing the problem of missing participants is a priority for the Department of Labor, and following the related guidance is a must-do for plan sponsors. Specifically, the DOL guidance instructs plan sponsors to: maintain complete and accurate census information; communicate with participants and beneficiaries about their benefit eligibility; and, implement effective policies and procedures to locate missing participants and beneficiaries. Going beyond these compliance necessities, Hawkins underscores the value of acting toward improved individual and plan balances, pointing out that 401k plan sponsors “stand to benefit from increased levels of consolidation, as plans with higher average balances tend to enjoy lower average plan costs, and their participants will experience the benefits of enhanced financial wellness.”
92.4 Billion In Lost Savings?
That’s not good for anyone’s retirement, right? But that’s the amount getting cashed out of accounts—annually! Increased participant awareness about the high cost of cashing out even accounts with small balances can make a real difference. Hawkins points out the imperative for educating participants on the harm of cashing out early:
Each year, at least 6 million job-changing participants — around 40% of the total — will cash out completely, representing $92.4 billion in lost savings, according to EBRI. While some cash-out leakage is to be expected in our voluntary 401k system, only about one-third of those cash-outs are due to an actual financial emergency, based on a 2015 Boston Research Technologies study. The demographic segments that suffer the most from cash-out leakage include minorities, lower-income workers, and younger age cohorts, all cashing out at much higher levels vs. the broader population.
While participant education is key, plan sponsors also have the ability to propel further progress by making it easier for employees shifting jobs to “roll” their retirement savings in and out with them. In addition to advancing autoportability, Hawkins suggests these three tasks for plan sponsors:
- If your plan is in the 5% of plans who don’t allow roll-in contributions, update your plan provisions to allow them.
- If you already allow plan roll-ins, promote the roll-in feature to newly enrolled participants.
- Encourage more consolidation at enrollment via a facilitated roll-in programor following termination through an assisted roll-out program — both of which can make the consolidation process painless for participants.
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