RESOURCES / PLAN DESIGN

Stem the flow of retirement plan leakage

5-minute read

THE TAKEAWAY

Take proactive steps to help participants retain more of their assets

Overview

John Doyle

Senior Retirement Strategist

Retirement plan leakage risks derailing employees’ long-term savings goals. 

Plan leakage reduces aggregate 401(k)/IRA wealth by about 25% at retirement, according to the Center for Retirement Research at Boston College. Some plan leakage is intentional, due to hardship withdrawals or loans for a house, education or life event. Other times it’s unintentional: resulting from a confluence of job changes, small balances and complicated rollover procedures leading to cashouts or stranded assets. The recent example provided by COVID-19 heightened plan sponsor awareness of the potential impact on America’s retirement readiness. Plan sponsors can take action to help participants keep more of their 401(k) assets working toward their future retirements. 

Action steps

Facilitate emergency savings accounts

Low emergency savings can drive leakage, so make it easier for participants to save for emergencies such as a payroll-deduction “rainy day” savings program.*

Give employees guidance

Help participants understand changes to programs such as increased loan limits. Additionally, assist participants in making more informed decisions based on their circumstances.

Allow continuation of loan repayment

Most plans require loans to be repaid immediately following separation of service or be subject to tax and early withdrawal penalties. Allowing participants to continue making repayments following separation of service may reduce leakage and help retain participant assets in plans. 

Take the mystery out of rollovers

Help mitigate leakage by providing necessary roll-in paperwork and guidance to new employees, and educate departing employees about the advantages of rolling over assets into their new employer’s plan or an IRA.

Support “auto portability”

Support industry and legislative efforts to provide automatic mechanisms to consolidate, streamline and port over disparate retirement assets for new employees. The easier we make it for participants to help themselves, the greater the potential for better outcomes.

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*Source: Secure Retirement Institute

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