Boston Research Group says making it simpler for job-changing workers to shift funds between retirement plans would reduce cashouts and save money. Over five years, studying a plan sponsor with 200,000 participants and a 25% annual turnover rate, BRG found that those departing employees with personalized start-to-finish help from impartial counselors cut cashout rates in half and saved an estimated $6 million.
Those who got help with their transition left fewer stranded accounts, BRG says.
“The defined contribution system is very efficient at bringing assets into plan accounts, but is very weak at moving money between accounts. There is a tremendous amount of friction that results from complex rollover procedures and an absence of assistance at the point of job change,” says Warren Cormier, president of BRG. “The result is too often leakage – participants taking the paths of least resistance by cashing out or leaving their accounts behind with their old employers – which result in huge costs to them, employers and providers. The goal is obviously to stop cashouts and keep the dollars either in their next employer’s DC plan, preferably, or in a qualified account such as a low-cost IRA.”
The employer in the study, a health care company, engaged Retirement Clearinghouse to assist participants with rollovers to new employer plans and existing IRA plans, as well as to locate missing participants.
“Understandably, this is only one case study, but the outcomes deserve a closer look from the industry as this is the kind of private market solution that can be implemented with swifter impact than regulatory reforms,” says Cormier.
At present, the retirement system unintentionally encourages negative behaviors by making them paths of least resistance, Cormier adds. Requiring participants to make decisions in 30- or 60-day time frames and presenting them with complex options leads to cashouts, stranded accounts and other destructive calls.
