Participants in defined contribution plans, when acting without the benefit of better guidance, often make decisions that mean their account balances suffer from loans and “leakage”—but advisors can help to keep such losses down.
That’s according to research from the December 2015 edition of The Cerulli Edge, which found that when participants were better educated regarding the high cost of loans and early withdrawals, they were far less likely to simply withdraw the funds from a retirement account when changing jobs.
Bureau of Labor Statistics data indicate that the average worker will change jobs 9–12 times during his lifetime.
And while auto-enrollment and other automated plan features help to boost retirement balances, they’re certainly not a “true panacea” because of that job-hopping statistic—meaning that lots of workers fall through the cracks, not just when deciding what to do with the money from a previous employer but also when being enrolled into a new plan at a new employer.
“Essentially, if participants were automatically enrolled at a robust 6 percent (not currently the norm), and escalated 1 percent annually, by the time they reach the minimum recommended deferral percentage of 10 percent, they switch jobs and start all over again,” the report said. “Compound this deferral problem with 9–12 decisions as to whether to leave the account as is, roll it over, or take a cash distribution, and all of a sudden, numerous obstacles to saving start to present themselves.”
Cerulli recommended that not only should recordkeepers and employers offer additional offerings, particularly regarding early distributions, but they should do more to educate participants on the high cost of early distributions.
“Either some sort of phone consultation, illustration of lost future value, or net takehome after taxes can do an effective job in dissuading participants from accessing funds prematurely,” the report said, adding, “It should be required that these transactions happen over the phone or an online chat program, which would present significantly more roadblocks before the withdrawal or loan comes to fruition.”
Such strategies, involving interaction with an advisor of some sort rather than an automated process, should help all employees but those with the most serious cash flow issues from simply taking out the money prior to retirement.
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