Part 1 of a two-part series: Simple communications may prevent asset depletion
“Asset leakage from defined contribution (DC) plans and the retirement security of Americans is a growing issue, and one I believe can be addressed by improved, simple, concise communications to participants outlining their options post-employment.”
This was the key message in Jennifer Flodin’s testimony on Lifetime Plan Participation before the ERISA Advisory Council in Washington on August 19. Ms. Flodin is DC Practice Leader and Senior Consultant at Plan Sponsor Advisors, a division of Pavilion Advisory Group Inc. which advises on close to $30 billion in DC assets.
The problem, Ms. Flodin revealed, is that one in three employees cashes out his/her defined contribution balance post-employment and prior to age 59 ½. Almost a quarter of those cashing out are under the age of 30, a growing segment of the population that is expected to experience multiple job changes over their careers. Forty-five percent of 401(k) participants who leave their job take a distribution of their balance.
Ms. Flodin reviewed samples of post-employment, participant communications to determine whether their form and content could potentially influence participant behavior. She found that, more often than not, many plan sponsors were simply forwarding record keeper information, rather than creating customized messaging that outlined participant options, including the benefits of retaining their balances within the plan.
Here is a summary of her observations:
- Communication length ranges from a simple one pager to a 14-page brochure.
- The phraseology of how the communications refer to the participant no longer working at the company is interesting. It ranges from “you are no longer an active participant” to “a job transition can be overwhelming”, to “now that you are eligible for a full distribution”.
- The ordering and positioning of the options available to the participant are varied, although most often the first option listed is either to leave the money in the plan or to roll money out of the plan.
- Some of the notices offer sample calculations demonstrating the impact of taxes and penalties for those under age 59 ½ that are taking a distribution.
- Very few of the communications are personalized. Most simply delineate by those that have balances above or below the plan’s cash-out threshold of $1,000 or $5,000.
- One provider shows a calculation, for someone under 59 ½ years old, of a hypothetical cash-out distribution of $50,000 and the net amount after taxes and penalties.
- None of the communications reference the potential benefit of ongoing fiduciary oversight to monitor investments and fees if the balance is left in the plan, or the potential for reduced investment expenses.
In part II of this subject, Ms. Flodin looks at what’s working and not working in preventing asset leakage from DC plans, and provides recommendations to improve the processes and communications that many plans follow. Click here to read part II.
 Ms. Flodin’s remarks to the ERISA Advisory Council are her own, and do not necessarily reflect the views of Pavilion Advisory Group Inc. nor any of its employees, officers or directors nor any company affiliated with Pavilion Advisory Group Inc. or their employees, officers or directors.
 Fidelity Viewpoints, Beware of Cashing Out Your 401(k), April 2015
 Boston Research Group, Eliminating Friction and Leaks in America’s Defined Contribution System, April 2013