Departing employees need better 401(k) adviceNews added by Benefits Pro on May 3, 2013

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Joined: September 07, 2011

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By Paula Aven Gladych

If employees who leave a job were better counseled about what to do with their 401(k) plans before they go, fewer of them would cash out of their plans.

It's a fairly intuitive notion but Boston Research Group found the hard evidence to say as much by following an innovative account consolidation program instituted by a large plan sponsor with 200,000 participants and a 25 percent annual turnover rate from 2007 through 2012.

It found that providing departing employees with personalized start-to-finish assistance from impartial counselors cut cashouts in half, reduced the number of stranded accounts and saved an estimated $6 million in costs.

A similar approach that monitors the movement of participant savings from defined contribution plans to other retirement savings vehicles, particularly other 401(k) plans, would keep billions of dollars that exit the system prematurely each year invested in retirement, the study found.

“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,” said Warren Cormier, president of Boston Research Group and a leading market researcher in the defined contribution industry.

“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,” he added.

The case study was of a large health care company that engaged Retirement Clearinghouse to assist participants with rollovers to new employer plans, existing IRA plan and to locate missing participants.

Helping participants with decision-making and follow-through as they transition from one job to another is by all accounts critical.

The retirement system, as it stands now, encourages participants to take the easy way out by taking their money or leaving it where it is when their minds are focused on their new opportunity and their futures. Many times the options are not communicated clearly and people don’t understand what they are supposed to do.

Originally published on
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