Boston Research Group Study: Easing Job Changers' Ability to Move Savings Between Retirement Plans Would Fix Flaws in Defined Contribution System, Deter Bad Decision-Making, Save Money

WOBURN, Mass., April 25, 2013 /PRNewswire/ -- Making it easier for workers to move money between retirement plans when changing jobs would fix major flaws in the retirement savings system that cause costly, negative behaviors such as cashouts, according to a new case study by Boston Research Group (BRG), a leading researcher in the defined contribution industry.

Studying an innovative account consolidation program (2007-2012) instituted by a plan sponsor with 200,000 participants and a 25 annual percent turnover rate, BRG 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, system-wide utility that facilitates 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."

By contrast, 401(k) plan participants in the large employer case study examined by BRG received personalized assistance when making decisions about what to do with their savings. The plan's cashout rate dropped by 50 percent as many participants chose to consolidate their savings in their next employer's 401(k) plan or in existing IRA accounts.

The employer, a large health care company and one of the nation's largest employers, engaged Retirement Clearinghouse to assist participants with rollovers to new employer plans, existing IRA plans, and to locate missing participants.

"This kind of approach makes sense for all parties," said Cormier. "Plan sponsors can reduce administrative issues, fiduciary risks, and lower plan costs, participants can do a better job of managing savings and also pay less in account management fees, and providers can retain assets," added Cormier. "Understandably, this is only one case study, but the outcomes deserve a closer look from the industry as this is the kind of private market solution that can be implemented with swifter impact than regulatory reforms."

Helping participants with decision-making and follow-through as they transition from or to jobs is critical, according to Cormier. Behaviorally, the retirement savings system unintentionally encourages participants to take paths of least resistance such as cashouts and stranded accounts by:

• requiring ARO participants to make a decision in a fixed 30- to 60-day time frame;
• asking participants to make decisions at separation, a point at which they are more likely to be highly emotional and uncertain about their futures;
• presenting them with complex options that they don't understand; and
• not providing sufficient personalized decision-making help, particularly to lower-balance participants, at separation.

The white paper, entitled "Eliminating Friction and Leaks in America's Defined Contribution System: Fixing the Systemic Breakdowns that Impact Every Sponsor, Participant and Provider," is available at http://www.bostonresearch.com/whitepaper.pdf

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About Warren Cormier
Warren Cormier has more than 25 years of quantitative and qualitative experience in the areas of workplace culture, employee engagement, and employee benefits. Cormier's clients are concentrated in financial services, specifically investment companies (both retail and institutional clients), banks, and insurance companies.

Cormier is also recognized as a market research leader in the Defined Contribution industry, having been named one of the top 50 most influential people in the industry from 2006-2013. Cormier is the author of the DCP 2000 - 2013 plan sponsor satisfaction and market dynamics studies that have become the standard for service quality and trend measurement in the 401(k) arena.  He also created similar DCP studies in the advisor and participant channels. In 2006, he co-founded the Behavioral Finance Forum with Dr. Shlomo Benartzi of UCLA.  The mission of the forum is to foster collaboration between the world's leading behavioral finance academics and leading financial institutions to help consumers make better financial decisions.

About Boston Research Group
Since 1987, Boston Research Group has been helping companies in a wide range of industries understand their customers and markets domestically and abroad. Its research expertise in specific industries enables it to work with clients in defining, creating, and executing solutions to marketing challenges. Boston Research Group's senior professionals have extensive market research experience in a wide variety of industries.

SOURCE Boston Research Group