NAPA Net
What Drives Cashouts?
Posted By Michael Bushnell On May 21, 2015 @ 9:23 am In
DC Plan Design,Plan Health
Studies show that more than 40% of workers cash out their DC plan balances
when they leave their employer. In the Spring 2015 issue of NAPA Net the
Magazine, Warren Cormier explores some reasons why.
Cormier writes that, even for workers who leave on their own terms, a
termination instills negative emotions, making irrational decision-making more
likely. And since many plans donft allow outgoing employees with balances under
$5,000 to keep their money in the plan, many would rather take the money and
run, regardless of whether theyfre taking a job elsewhere or not.
gAll this leads many participants to find the offer of a large lump sum of
cash almost irresistible, particularly among lower-income, small-balance DC
participants who value even a small amount of money in their account much more
than high-income colleagues do,h Cormier notes. gThe cash is an attractive offer
in an emotionally turbulent time where logic is replaced by what efeels goodf at
the moment.h
Cormier finds that, of those who cashed their plans out, most of them donft
have a specific plan for the money. While 47% report spending their balances on
housing-related costs, Cormier says that this is because people plan on spending
the money on whatever bills arise first, and there is usually no bigger (and
more consistent) bill than the rent or mortgage.
In a study Cormier conducted with Retirement Clearinghouse featuring
responses from 500 randomly selected callers who said they wanted to cash out
their DC balances, nearly one in five said they would use the money for
gnonessentials,h essentially forfeiting money down the road for a short-term
fix.
But, in Cormierfs words, as long as itfs easier to cash a check than do
anything else, and as long as Americans continue living beyond their means in a
still-uncertain labor market, leakage is going to continue.
gUnless we make the best decisions the easiest to execute, other steps will
be ineffective,h he advises.
To view Cormierfs full column, click here [1] and select gThe Face of Frictionh
from the article index. To view the full 78-page spring issue of NAPA Net
the Magazine, click here [2].