How Job Changing Impacts Retirement Savings
In conjunction with Boston Research Technologies, RCH announced the findings of a groundbreaking research study on America’s mobile workforce, providing insights into participant behaviors regarding retirement savings portability. The study offers plan sponsors with strategies to stem cashouts and to improve retirement outcomes. On May 28th, RCH and Boston Research Technologies teamed with PLANSPONSOR to deliver a webcast, where attendees were presented the study’s key findings, implications and action items.
- A majority of participants base their distribution choice at the time of job change on convenience and thereby harm their retirement readiness.
- Participants are overwhelmingly receptive to using their qualified plan as their primary retirement account during their working careers, and rate employer-sponsored roll-in services as an excellent and valuable benefit.
- Portability solutions are needed to make in-plan consolidation the default option for those segments of the participant population that are uncertain about their distribution decision.
- Every plan sponsor can benefit from this research!
Transciption of Webcast:
Alison Cooke Mintzer (ACM): Good morning, good afternoon everyone this is Alison Cooke Mintzer. I’m editor and chief of PLANSPONSOR and Plan Advisor and I’m pleased to be your host and moderator for today’s webcast titled, Actionable Insights for Your Mobile Workforce: Portability Solutions Key to Improving Retirement Outcomes. We’ve got a great presentation for you today and I’m really excited about it. I of course want to thank Retirement Clearinghouse for making today’s presentation possible for all of you. Before we get started and I introduce today’s speakers, I’d like to take a moment, if I can, to go through a couple of house-keeping items. First, we will be taking Q&A at the end of the session and so if you’d like to ask us a question, please feel free to do so using that lower little box you see on the lower right hand side of your screen, titled Q&A. You can write your questions in it anytime and we’ll cue them up for the end.
(1MIN)
So please take advantage of that if you have any questions for us. And secondly, I know quite a common question is weather or not you’ll be receiving a copy of today’s presentation so I want to advise everyone that yes, you will be receiving a copy of today’s slides in PDF form as well as a link to the replay of today’s event in case you’d like to revisit or re-listen to anything that we discuss here today. So be on the look out for an email from PLANSPONSOR with that information. And now with house-keeping out of the way, let me introduce today’s speakers, Warren Cormier and Spencer Williams. First, Warren is the founder and president of Boston Research Technologies. He co-founded the behavioral finance forum with Dr. Shlomo Benartzi of UCLA. He is recognized as the market research leader in the Defined Contribution industry; voted by DC professionals into the Top 50 Most Influential People in the industry. He’s also the author of the DCP plan sponsor satisfaction and market dynamics studies, which is the standard for service quality and trend measurement in the 401(k) arena.
(2MIN)
And last, but not least he is the author of Eliminating Friction and Leaks in America’s Defined Contribution System, drawing attention to the systemic issues caused by lack of retirement savings portability. Welcome Warren, we’re glad to have you.
Warren Cormier (WC): Thank you. Great to be here.
ACM: And joining Warren on our call today is Spencer Williams. He’s the Founder, President and CEO of Retirement Clearinghouse. He’s an innovator, entrepreneur and leading industry advocate for plan-to-plan portability solutions, particularly for small-balance job changers. Spencer’s influential amongst public policy makers and industry centers-of-influence, promoting systemic solutions that stem retirement savings “leakage” and promote retirement savings consolidation. He has more than 30 years of experience in the financial services industry, including numerous senior executives roles with leading financial institutions. Welcome Spencer.
Spencer Williams (SW): Thank you Alison.
(3MIN)
ACM: And with that, let’s start talking about our presentation today. Our panelists are going to be speaking about a research study, which was the first of its kind. Research to look beyond the statistics to understand participant behavior and psychology associated with the retirement plan distribution decision – something that plan sponsors are ultimately familiar with, or intimately rather, familiar with. Boston Research Technologies conducted the study in collaboration with Retirement Clearinghouse. More than 5,000 participants in a retirement plan were surveyed and the survey was conducted just last month in April. And we’re going to talk through some of the interesting results of the survey. We’re going to talk though what the results of the survey can mean for plan sponsors. But before we get into the nitty-gritty, Spencer do you want to maybe talk through a little bit about an overall look at what you were looking into and the purpose of the study?
(4MIN)
SW: Yes, thanks Alison. Before I turn it over to Warren who will really present the meat of the findings today, just to give a little bit of background to all of the folks who are taking time out of their busy days and to give you an idea of why we did the survey, you can read on the screen some of the key conclusions. Why we did the survey was because we did a found a hole in our understanding and in the research around portability issues. Many of us on this call are familiar with retirement plan leakage and there’s lots of statistics available on that. You know the highlight of those is that you look at the very smallest accounts out there, particularly those with less than $5000 dollars and we see a lot of people, about 3 and a half million people with that account balance or lower changing jobs each year and more than half of them are cashing out.
(5MIN)
What we wanted to find out was why? Why are they cashing out? We went further once we started to understand the mobile work force – there’s other information available – EBRI is a great source for this that shows about 10 million participants a year change jobs. Two-thirds of those folks have less than $20,000 dollars at the time they change jobs and all sorts of things are happening. Sometimes they’re leaving accounts behind in plans, sometimes they’re cashing out, sometimes they’re making their way to a new plan, sometimes they’re rolling out to an IRA. Again, the questions we tried to answer was why? Our key conclusions from this quite extensive research was that a majority of participants are basing their distribution choice on convenience. What’s the easiest thing for me to do? Warren is going to further expose that in a second.
(6MIN)
The second big conclusion that came back to us was that participants were overwhelmingly receptive to using their qualified plan in particular when you look at younger ages they look at their plan as their primary retirement account during their working years. That preference tended to change later in their lives. Participants further rated roll-in programs, ie. Their sponsor, their plan is helping them consolidate in their current employer plan as an excellent and valuable benefit. And last, to fill the big gap that’s out there in the market today, there was a need identified for portability solutions to be implemented at the plan level. Need because as I said the results are scattered and all over the board and if we want to meet this need that the participants have or using their plan, we’re going to have to help them do it. Just like we help them do other automatic types of solutions.
(7MIN)
So with those key conclusions, I look forward to seeing questions pop-up on the screen. And I even look forward more to Warren Cormier presenting the key findings.
WC: Thank you Spencer. I’m going to go through some of the key findings, as Spencer said. There’s an enormous amount of data in the study, but we tried to pull out the things we thought were most interesting for the purpose of this webinar and the first thing I want to do is talk about what distribution decisions different generations are making. We see that there are – that there is a generation effect. What you see here is that how many times people in the millennial age cohort the GenXers and the Baby Boomers made each type of decision – rolled to an IRA, cashed out, etc.
(8MIN)
By the way, for every single time they had a plan and what we see from the data is there is an awful lot of plans out there that people participated – the title is the mobile work force – people participate in so many different plans and they have opportunities to change jobs and to do different things. We can see with Millennials 33% rolled to an IRA, 34% cashed out and you can see the different activities for each of the generations. As we go to cash outs – What we’re going to do in this presentation I’m going to talk about cash outs and then we will go over here about rolled into the new plan and leave in the prior plan as groups.
(9MIN)
So first step is going to be looking at cash outs. So, cash outs are putting retirement at risk across all age groups, no one age cohort has a monopoly on being the people that cash out. In terms of cashed out at least once over their working lifetime. We see that this is somewhat more prevalent among Millennials and GenXers than Baby Boomers, with a third or 34%of the Millennials and GenXers have cashed out at least once in their lifetime and the baby boomers about one out of four and we also see in the bottom row that in some cases a small percent has cashed out more than one account. So it’s not that rare of an event.
(10MIN)
In terms of the balances they are cashing out, we saw that the older participants are cashing out larger balances across the top. You see, the amount taken cashed out of the previous plan is looking at their most recent plan that they cash out of. We can see that if a baby boomer is much more concentrated - 75% are above $5000 whereas for the Millennials it's about 53% - 55% and for about GenXers it’s about 59%. But as you grow older – of course there are more plans accumulated at that time, but we do see that the older participants are cashing out larger balances. One of the things we wanted to look at was – so what are you doing with the money? One of the things we found was first of all there are generational differences, and that for people who told us what they did with the money – making debt payments was the most popular reason.
(11MIN)
It’s about 36% who gave a reason said that debt payments was the use of the funds. We also saw in the second row emergency – people describing this as I need to take the money for emergency purposes. In most cases they were not voluntarily quitting their jobs or changing jobs so there would be some emergencies here. But we saw overall about half of the respondent said that the cash out was an emergency and the other half said that it wasn’t. We see some transportation requirements and special events for the family. But generally, what we saw was that many participants were using the cash out money in their plan as a kind of private unemployment insurance program.
(12MIN)
That is that they were going to use the money to pay bill in between jobs; they were going to use the money to pay for expenses to find a new job and things like that. So there were expenses that were related directly to “I’m not working right now.” In terms of what drives a cash out, regarding….
ACM: Warren, sorry we have a question about the study itself – so I’d like to ask it while it’s relevant. Did any of this, when you talked about cash outs did you include loans that were defaulted as a cash out?
WC: No, this was strictly people who said we took the money out of the account. We actually specified and put it into a personal checking account or other type money market account or that type of thing. So no, it did not include defaulted loans.
(13MIN)
ACM: Thank you, sorry to interrupt.
SW: Alison, let me jump in real quick just to put some context around that – there’s some great EBRI data out there that shows that of all of the dollars reported as leakage roughly 89% of them are what we’re terming as cash outs in this study. So 89 out of every 100 dollars and each of loan defaults and hardship with drawls kind of split 50/50 between the remaining 11%. So we focused the study on the big fat part of the leakage problem.
ACM: Ok, I appreciate it and sorry to interrupt, but saw the question come in wanted to ask it while it was relevant.
WC: No that’s great, thanks Alison. So back to the “what drives cash outs?” We looked at it from several different ways. Two ways were income level and accumulated wealth level. We saw actually, when it came to income levels that we saw no consistent trend upward or downward as you move from making less than $50K to making over $150K.
(14MIN)
So it was not really driven by the income level; but what we did see much more correlation on the top row on this page in terms of the cash outs being driven by wealth levels that is the higher the wealth level the lower the incidents of a cash out and that would tie back to some people feeling that it was an emergency, that they needed to cash out to make ends meat between jobs. There was another level of analysis we did with the data. We went and we created a financial wellness index for each person and we found that financial wellness of the household was a far more powerful driver than even wealth.
(15MIN)
And financial wellness, as you know, is not necessarily the - only for people with higher levels of income. That high levels of income are also likely to over spend as low income levels. But we did see that wealth did play a role in predicting if a cash out would happen, but financial wellness was actually the most powerful predictor. The other thing we've seen, and we’ve seen it in several studies that we’ve done, is that there is a great deal of regret over taking a cash out. We find that people over – matter of fact, as they grow older, the level of regret having taken a previous cash out grows, as you can see from 36 to 46 to 53 as you move from Millennials to the baby boomers cohorts.
(16MIN)
But we do see that, this is something that is important to tell participants that if you are going to cash out – by the way a lot of people that have done it in the past have regretted that decision. Clearly here, a significant proportion of people that cash out eventually regret having made that decision. In terms of the generational differences and the type of decision they made – I want to focus on rolling into a new plan and leaving it in a prior plan. So we have covered the cash outs and we’re now going to move into people that made these decisions over here. The questions is why a separated participant leaves a balance behind. We see a bunch of reasons down here – I preferred investments in my previous plan so I left it behind – that's about 27% of the population.
(17MIN)
You see some slight differences there by age cohorts. Better service at my old plan 22 % - We also picked up some indications here, we’ll talk about process in a bit, but we also picked up some indications that the process to move it to the next plan may be getting in the way. I’ve referred to it before as friction. Not a priority to move it, not sure how to move it, the balance was too small to bother to go through the process, I didn’t have enough time to move it and it seemed hard to move out – so we’re picking up on those factors that could possibly have been related to the process of moving from a previous plan to the new plan. As you can see here again, not a priority, not sure how to do it, balance too small – we’re seeing indications of friction.
(18MIN)
What do they intend to do with the money in the previous plan? We saw some fairly even distributions – 27% for Millennials, 31% for GenXers and 42% for Baby Boomers that said I’m just going to leave it right where it is – and then we saw roll it over to the new employer plan was a higher incidents of people expecting to do that for Millennials than Baby Boomers. And rolling to an IRA about equal across the three groups – it was about 22%. Cashing out, again we saw that again here that the likelihood was higher among the Millennials than the GenXers and the baby boomers. You can see there was a certain percent that said I really have no idea what I’m going to be doing with the money that is still in the plan.
(19MIN)
I just highlighted those differences there. When we talked to them about whether or not they would be willing to use an employer provided participant paid, this is important that it’s participant paid, roll-in service we saw that there was a very high willingness for using that type of service and actually willing to pay for it. What you see here is the percentage that said they were willing to pay. We tested across a large variety price points so each person only heard one price point, which is the proper way to do price testing. We did see that 3 out of 4 Millennials would be willing to use this type of service even if they were paying for it themselves. It’s a little bit lower on the GenXers and about half of the Baby Boomers.
(20MIN)
But even at half that’s quite a high percentage of participants that would be willing to do it. Now, part of that is driven by the process and this is the existing process. We talked to people who currently rolled into their current account – their current DC account. We asked them questions about their experience in doing it. The first question was how long did that process take you from beginning to end? Not continuous work obviously, but over what time period did it happen. You can see here on the screen that 15% said one week or less, but we also had 27% say it took me more than 2 months from beginning to end. That more than 2 months it would take 6-8 months and some people were never able to complete the process.
(21MIN)
We also found interestingly enough, that the people that did it almost 2/3, 62% you can see in the lower left corner, asked somebody or had somebody help them with it to help them with the roll-in. That was pretty interesting that even though they did it they required assistance. So we asked who were those kinds of people and in some cases it was my accountant in some cases it was my financial planner, an attorney – we also heard in some cases that the existing new employer helped them to roll-in the money into their new plan. In terms of the time required or perceived time required once we showed participants who hadn’t done it before, showed them the steps involved we asked them to simply tell us – and it’s not that precise – what amount of time do you think that it would take you to go through the steps involved to roll into your new plan.
(22MIN)
We found that this is continuous work not a time period, not spending a half an hour one day, but continuous work. We saw that 18% that this would take me 5 hours of work; 20% said that this would take them more than 19 hours of work. We had a median value over 9 hours and an average of 18 hours to get this thing done. This is just the perception just looking at the process we showed them. We also asked – generally take those hours that you think it would take you to take the old plan to the new plan – how much do you value those hours and what kind of monetary value would you place on those hours that you are going to have to take to do this.
(23MIN)
You can see on the right hand side that 14% said less than $50 dollars but you have 21% saying that would be using my own labor and my own time that I would value it between $50-$100 for those hours. Total time for $500-$1000 dollars 15% said I value my time there too. So when you look at willingness to pay $79 dollars or $39 or $200 you can see why we got such high willingness to pay, because it was perceived as being a better option than spending your own time.
(24MIN)
Compared to the employee benefits received from the employer today would you say this is an excellent benefit, good benefit or a meaningless benefit if your employer decided to add this to their list of benefits. We see here that 46%, almost half said this would be an excellent benefit compared to what I get today. Another half, almost said that this would be a good benefit. So this is something that for plan sponsors it’s an interesting addition to the benefit package and we saw that 25% of those rolled in already indicated that they did receive help from their employer. Some employers are doing that already. And then we asked the question that if you didn’t have to pay anything and your current plan paid it, how likely would you be to use a portability service? And remembering when we exposed them to a price I think the high watermark for Millennials was 66% and it went down from there. And here we see if it was free and paid for by the plan they didn’t have to write a check or they didn’t have to have the money taken out of their own account that wiliness goes up to approximately 8 out of 10 for all three age cohorts.
(25MIN)
So there was quite a high level of receptivity there. We also asked them about their IRA accounts, do you have IRAs? And people that said yes, we asked them would you be willing to use a service like this to move your IRAs into the plan at your current employer and we also saw that all three age cohorts were highly willing to use their existing plan as a kind of primer retirement account and willing to consolidate my retirement qualified money into the current plan and IRAs would certainly be included in that.
(26MIN)
They indicated here that for Millennials and GenXers that 9 out of 10 said sure I’d be willing to do that and 2 out of 3 Baby Boomers. So those are the key findings and I’m going to turn it back to Spencer now for him to talk about some of the key findings and implications. And then we’ll do Q&A, so Spencer you’re back on.
SW: Great, thanks Warren. This is a great time for all of you that are on the call for any questions that you want answered on the call – I know we’ve kind of dumped a lot of data on you in the last 25 minutes or so and this actually represents a small fraction of the findings from the survey and over the coming weeks and months we’ll be disseminating that further. But if you have any questions start posting them up.
(27MIN)
My job here is to first, gather the key findings into the primary buckets that Warren identified. The first one is about cash outs and get them into one place. So for those of you that like cheat sheets, this is the cheat sheet for cash outs. Quickly, younger workers more likely, older workers are cashing out larger amounts, the majority of cash outs – this is perhaps a myth buster – are not used for emergencies, there are certainly plenty of emergency circumstances that were identified, but as Warren said it became a convenient honey-pot for other types of activities that folks used the money for. By the way, it wasn’t in our survey that the vast majority of folks, we didn’t report it on this screen – agreed that their qualified plan was suppose to be used solely for retirement. So its kind of funny watching the behaviors about what they say versus what they do.
(28MIN)
Second to last, cash out rates were all about wealth – and as Warren added some color, it’s about financial wellness as well, not so much your income level. And then lastly, cash out regret increases with age. You sort of wonder if we could get the older folks to teach the younger folks if we could slow this problem down. Now let’s take a look at what the implications might be for plan sponsors. So cash outs are clearly putting retirement at risk at all age groups. We all know the value of the dollar saved at age 25 is higher because of compounding than the value of a dollar at the age of 65.
(29MIN)
None the less, all age groups are susceptible to cashing out. One of the things we’d like sponsors to think about a little bit is your plan’s new hires. Every company has turn over, some industries’ turn over is higher than others clearly – we could probably identify those with out labeling any industries, what you might be surprised at is that literally across the United States for 50-something years the Bureau Of Labor statistics has reported an average turn over rate of about 12%. That's across all industries across the permanent work force in the United States. This has been going on for a very long time. We’d like to ask plan sponsors to think about their new hires, that's an actionable point in time where you can do something about the cash out problem.
(30MIN)
If we can keep them from cashing out as they come into your plan, obviously they came from somewhere else, we’ve done a good thing for their retirement readiness. The action items here – first of all we have to change participants’ reference points – this is kind of an all hands on deck item. It can be almost anybody – an advisor, a call-center for your plan provider, a plan sponsor themselves, anyone can help on this one which has changed the reference points. We would submit from the research from the penalties and taxes don’t appear to be a deterrent cashing out. Second, we found that translating the impact of a cash out into longer term values i.e., the $1000 dollars you cash out today at age 25 is actually $9000 at age 65 when you’ll need it.
(31MIN)
That type of demonstrated compounding for all ages is a very valuable tool to use when you are engaging a participant when they’re in this action zone – you know, leaving a job and going to a new job. And then finally, we would recommend implementing portability solutions. Help the movement of balances. We found that as Warren a couple of slides ago clearly identified that those people that sought help and got help were much more successful at preserving their account balances as they changed jobs. Of course, the friction, the convenience are actionable items at the plan level that can prevent cash outs. This next slide is about grouping our key findings about roll-in and we would strongly suggest at a very high level that cash outs and roll-ins can be related to each other.
(32MIN)
That by implementing a roll-in program for your new hires you can prevent cash outs. But now let’s look at roll-ins by themselves. First the findings, the majority of participants across all ages are leaving stuff behind based on convenience. As we saw in the research earlier and a couple of questions that have come up – will we get copies of these slides? The answer is yes, everybody can have copies of this research. I wish I had the slide number at hand, but a majority of stranded accounts will leave your plan – this finding was entirely consistent with other work that we’ve done with very large employers that over time the separated participants leave their account behind. Perhaps 25% of those accounts will stay there on a longer term, but the other 75% they’re moving. Our perspective is that you’d need to help them move.
(33MIN)
That that’s a better outcome than leaving the account at risk of an unintended or a decision made of convenience in the future. When it comes to roll-in the process is confusing, difficult to decipher and time consuming. Some folks have used the banking analogy and said “Imagine if it were this hard to get a check cashed, or an account moved, or money moved through the US banking system.” At the present, the process of transferring from plan to plan is a very difficult one and time consuming. You saw that in terms of both the folks who were successful at it and the amount of time they spent doing it. When we took the entire group of respondents though this survey through a portability concept test and said tell us how would this work for you, we got basically the meat was about 9 hours of an individual’s time to execute the process.
(34MIN)
Participants, and here’s the real story, are highly receptive to using their plan throughout their working careers and I think that’s why they would rate this as an excellent benefit. And then finally – a little bit of a surprise finding, and this was – this of all of the findings that we had tilted towards the younger generations a significant of the younger workers with an IRA would consider moving that money into their plan. That preference dropped significantly as our survey respondents got older. So the implications for sponsors - we all know that portability is legislative or statutorily imbedded in our plans but it’s one of those services that hasn’t been implemented broadly across the system.
(35MIN)
Our point of view, and this can be demonstrated, that portability solutions actually improve your plan metrics. So if you’re a plan sponsor, just think about the small stranded accounts that are left behind in your plan and then think about your new hires and what would happen if all your new hires came with a balance from one or more prior employers. The same thing was happening with your separated participants. They ended up in another employer plan. I know that it’s a big vision, but it’s one that we’d like to share with you. Your plan is a valuable resource and I think it’s being under-utilized in terms of being a point of consolidation for your participant’s savings. There’s a huge opportunity for you to boost your plan performance and assets through roll-ins. Someone else’s separated plan participant is actually your new hire.
(36MIN)
So if you address the issue at the point of new hire, we think you have a large opportunity to at least balance out what is currently a somewhat one way flow of assets out of plans as participants continue to change jobs. We think that those flows could be balanced as plan sponsors adopt roll-in services. Last but not least, we saw in the findings as we did in our Millennials and GenXers and Baby Boomers generational views and wealth that the communications need to be targeted. The younger folks are not responding the same way as us older folks and vice versa; so age and wealth-based communications. Action items kind of already talked about them, promote and facilitate roll-in services.
(37MIN)
It optimizes retirement readiness and frankly it utilizes your plan’s tools to their fullest extent if a participant has their full retirement account in your plan. Communicate roll-in benefits we’ve seen the value of this – it’s not a one and done type of communication, it’s not when the new hire shows up for the enrollment meeting for the first time and putting a slip of paper in the packet. Yea, we all do that, but it’s like most communications we absorb them over time and through a repetitive messaging and that’s the approach we would suggest in your plan. Repetitive messaging, age and wealth-based and really hammer the point home and that will increase the value of your plan. And last but not least, consider paying for it. Some of our largest clients do that today and their programs are measurably successful based on the fact that these are permissible plan expenses. So I think we’re at the point where we can take some Q&A and Alison you’re on deck for that.
(38MIN)
ACM: Great. Thanks guys, I have a questions in general and maybe Warren this is for you, clearly this is comprehensive study, you guys covered a lot of information, but I’d love to know of everything you researched, of all the data collected, what would you consider the most surprising finding?
WC: Well there are a couple of things that I thought were particularly interesting and surprising one is the willingness to consolidate all of their qualified money into one plan. That is we were expecting some but it’s interesting how much consolidation is valued by participants. Also, the perceived quality of the benefit to the compared to everything you have today how valuable would it be to you to have a portability benefit available to you. And that was quite high.
(39MIN)
The third thing and the final thing was the whole thing about whether or not the penalties are high enough or significant enough. Basically what we saw was over 8 and 10 people that did cash out said that they were aware that they were penalties involved. Now, whether or not they knew specifically what it was is in question. The issue may be penalizing them may not be - at least at 10% - they know they have to pay taxes eventually anyways - no harm in that, but the penalties of 10% were not stopping the people who eventually cashed out. Now we don’t know how many people who didn’t cash out were stopped by the penalties.
(40MIN)
But I was struck by that finding and that introduces a lot of behavioral economics in terms of explaining why this phenomenon is happening. It has a lot to do with loss aversion and prospect theory and enhance active choice, but really what its saying is we need to convert the cash out decision from you are going to receive a 10% penalty and put it more in terms the money that you are loosing is not $1000 dollars from the cash out today, the money that you would loose is more like five times that by the time you retire which changes the reference points on the decision to cash out. So those were the three things that stuck me the most.
ACM: Excellent, it’s always interesting to hear the researcher’s prospective on what they thought about the research.
(41MIN)
You know, Spencer you went through a bunch of the take-aways and the action items, but I guess if you look at everything we talked about what is the biggest take away for plan sponsors regarding cash outs? In your opinion what should plan sponsors be doing tomorrow that they are not doing today?
SW: I look at it holistically Alison, it's a great question. I think the answer is start looking at your plan and in it’s fullest potential – as the place of consolidation for all of your employees. There were some statistics, I’m not sure if it was this survey or another, but about one out of every two participants has another retirement account somewhere. By the way that's your entire population of participants.
(42MIN)
Now, what we think should be happening today is trying to address your entire population of participants that’s a big task to take on right away, but if you think about it about the new hires, that’s an actionable point that can be addressed today. By getting the new hires, or educating the new hires, making them aware of the value of the plan right up front and actively, pro-actively promoting the idea that they should move their money into the plan; whether the plan pays or the participant pays – yea you’ll have a higher success rate if the plan expense, but we saw a very high response rate to participants willing to pay for it, just to have the work done for them. And they see the benefits of the plan. Okay, so here’s what happens if we attack the problem – let me just go to theoretical world – if every plan sponsor tomorrow morning had a program for their new hires to help them roll-into the plan we would dramatically reduce the amount of cash outs that are going on out there.
(43MIN)
We clearly identified that cash outs are happening because they’re the easiest to do – they are also clearly not the smartest thing to do. The smartest thing to do is to retain your savings, whether you do that in a IRA or in a plan, and if you’re in your working career – our point would be to use the plan as the consolidation point. There may be other needs later in life for an IRA or at any other point in time, but if all plans did that tomorrow morning we would dramatically reduce the cash outs, increase the efficiency of the plan itself and the really big win is retirement readiness starts to pick up from where it is today to ever higher levels.
ACM: Thanks, definitely food for thought; things to take back and consider.
(44MIN)
We do have a lot of questions coming in and I’m going to start going through what we’ve got here. Warren, is there any information or any data of the pain points about rolling money into the new plan? What’s the deterrent to completing a roll-in?
WC: Clearly the process is getting in the way. There’s just no question about that & that is the biggest step and problem. We also saw that a lot of people couldn’t even do that. They didn’t say that they weren’t, they said I didn’t know. Two recommendations from that – one is obviously education, letting people know when they leave or when they join you as a plan sponsor let them know that that is possible to do. Also, I don’t expect that the process will be changed quickly or nothing moves that fast in Washington, so I don’t think that’s going to happen; but masking to the participant the difficulty of moving to the roll-in, essentially it’d be masking the pain point. As the employer we can make that happen for you is the recommendation coming out of that – but those are clearly the pain points.
(45MIN)
ACM: Makes a lot of sense and when you talk about take-aways and the plan sponsor should do when you talk about plan sponsors encouraging the roll-ins – what about with exiting employees? Is there any thought that the plans sponsor should also do the reverse and encourage employees who are leaving to roll out of the plan? That way people would get the message both leaving the former employer and going to the new employer.
(46MIN)
WC: It works on both ends. The question you might have is: why would an employer do that for someone who’s leaving them? Well obviously lots of employers provide benefits to people who leave their company, but this is the existing employees are watching as to how people are treated when they leave and showing that level of care and concern when people are leaving the company is always a good thing – but certainly on both ends of the transaction, from leaving the job to starting the job, it makes sense to be communicating.
SW: So, Alison, let me go there – I’m sure a lot of our listeners read about the quote sharing economy – the Ubers of the world, Air B&Bs.
(47MIN)
One of the points we would like to emphasize is there is a little bit of a community that required to make this work. So this question is actually a great question; If I’m an employer should I educate people who are leaving here what they should do with their money, with a primary emphasis on – hey, if you’re going to another employer-sponsored plan, well be sure to check it out to make sure the plan is good and all that kind of stuff. Yes, that’s they type of thing that you should be doing. The community aspect of it, or the sharing economy aspect of it is these folks or participants who are in the status of changing jobs are kind of in no-man’s land today. No one owns the ones leaving and there hasn’t been a lot of ownership for the one’s coming in and the results are evident to us now.
(48MIN)
We have lots and lots of duplicates in the system; we lots and lots of very small balance accounts in the system; we have lots and lots of people cashing out because of convenience issues because it seems to be too hard. But if plans thought of themselves as connected to the next plan, whether it be new hires which makes the most sense to us – it’s a new employee, you want to welcome them, you want to throw out the welcome mat and say hey listen we got a great series of benefits for you – here’s one you really got to consider. But just as equally on the backside, if employers picked up on that they’re going to be solving problems that exist in their plan today, which are small accounts that get left behind, oh by the way most of us change residences and pretty much the last thing we do is notify all our old employers of our new address so they can send us all of the materials on that old plan that we left behind 15 years ago.
(49MIN)
So just think about that problem being solved by the community or the shared economy in retirement, helping people move from plan to plan.
ACM: Excellent, it’s a little like that analogy when you raise a kid, it takes a village – it's a little bit here too, you know it kind of takes everybody to come together and really help participants help themselves and really not hurt themselves. Obviously, a little bit of a different analogy, but
SW: Well, there’s a macro-stat out there so EBRI calculated that if we, the village, got together and cut the cash outs in half that we would add 1.3 Trillion Dollars in savings over the next 10 years.
(50MIN)
You can reduce that down to a number and it comes out to 19-20 thousand dollars per participant in the system today. I would suggest that with the average balances today that 19-20 thousand added to each of those accounts is a significant number. And it increases the value of the benefit, it increases individuals’ retirement readiness – there’s just all sorts of good that come from that.
ACM: This is an interesting question and I wonder what either one of you thinks of this. When we talk about people cashing out and helping them to try to understand what that longer term value could be and Warren, some of the data you were showing about how people’s regret grows as they get older because the Millennials who just did the cash out the present value of money is important to them, but when you see the baby boomers they really considered it a regret.
(51MIN)
The question is should plan sponsors be talking to their administrators about putting that longer term value on distribution papers or basically communicating that longer term value ahead of distribution. It’s a little bit different.
WC: I would think that would be a great recommendation to make. Like we said we need to change the reference point. In the survey itself we had a little calculator in the questionnaire, where somebody told us their age early on in the survey, they told us how much they cashed out most recently and we calculated for them the value of that money at age 65 – we just picked that as the average retirement age. What we found was that 1/3 of people who cashed out said had I known that information I would have rethought this decision to cash out.
(52MIN)
If I was using it to buy groceries, that actually was a pretty expensive loaf of bread that I was kind of twittering the money away on different things. We saw and tested that in the survey and found that it had quite a dramatic effect. There’s no one step alone that will take care of all cash outs, but when your chipping away at things like that at 30%-33% it would change their mind. It’s a pretty impressive step.
ACM: Absolutely. I know we’re coming up on time, but there’s a clarification question. When you were talking about consider allowing this is a permissible plan expense, do you mean that to be a participant expense attributable to the participant’s account or a plan level expense?
(53MIN)
SW: Yes, we’ve seen it both ways Alison, but when we say a permissible plan expense we’re thinking of a plan level expense so like any group benefit. Certain people may be benefitting from an action this year and others next year and a different group after that. Over time particularly with the turnover rate particularly in higher turnover industries everybody gets a shot at the benefit. So permissible plan expense is we’re paying it at the plan level, not the individual level. We see about a 20%-25% bump in hiccup rate when that is done as an individual deducting it from their account.
ACM: Excellent, thank you. Appreciate the clarification.
(54MIN)
That looks like all the time we have. I hate to cut it short, but we are right up on time and I want to be mindful of people hoping off to get to their next meeting. I want to thank all of the attendees today. I hope you guys found this of interest and I want to remind you of this question that you will be getting a follow-up email both with a link to today’s recording as well as a copy of today’s presentation. Of course, I want to thank our speakers today and thank Retirement Clearinghouse for bringing the presentation to all of us. Thank you Warren. Thank you Spencer - appreciate your time. Thanks everyone for your attention and time and we appreciate you on the call and look forward to having you at a future event.
(54:52MIN)