December 2015, BOSTON. According to research from global analytics firm Cerulli Associates, cash-outs and loan defaults are responsible for more than $80 billion in lost retirement assets in 2014.
“Premature distributions, cash-outs of retirement accounts, and defaults on loans are major sources of DC asset leakage and were responsible for outflows of nearly $80 billion in 2014,” states Shaan Duggal, research analyst. “Limiting these leaks is of the utmost importance to participants and the retirement industry.”
In their report, Evolution of the Retirement Investor 2015: Insights into Investor Segmentation and the Retirement Income Landscape, Cerulli examines retirement decisions made by individual investors throughout their retirement planning lifecycle, with particular emphasis on 401(k) plan participants, IRAs and rollovers, and retirement income. The report profiles these individuals to assist firms in developing segmentation strategies aimed at capturing assets earmarked for retirement.
“Part of the problem is that outside of the interaction with their recordkeeper or IRA service provider, there is really nothing stopping anyone from accessing either a terminated DC or IRA account early,” Duggal explains. “Nearly every Gen-Xer who completed a cash distribution from their 401(k) ended up paying an additional 10% penalty on top of regular taxes to the IRS. When a distribution is requested, recordkeepers should spring into action, conveying the benefits of preserving the tax-deferred nature of the assets.”
“Loans are also a source of 401(k) leakage, albeit smaller, but when they are defaulted on immediately they cause a taxed and penalized event for the already cash-strapped individual,” Duggal continues. “Removing the entire loan function from the plan may be extreme, but restricting the amount of outstanding loans to only one will slowly do away with the idea that the DC plan is meant to be a source of short-term liquidity.”