Nevin's Data "Points"

A week or so ago, I came across an announcement that IBM was making changes to its 401(k). More specifically that, effective next year they were going to replace their matching contribution in their 401(k) with an employer contribution to a cash balance plan. [i] In the days that followed, the news was picked up in a couple of different trade publications—the implication being that this might be signs of a new shift in plan design. Heck, even Teresa Ghilarducci weighed in , championing the “evolution” to a defined benefit structure from the “flawed” 401(k). She never misses an “opportunity.” Readers here are likely familiar with the basic concepts of a cash balance design. Technically a defined benefit plan, it’s generally referred to as a “hybrid” because it also has a number of participant-friendly aspects that it shares with a defined contribution plan, notably an account balance (though it’s a “notional” one) that is shared with participants. The benefits accumulate ...

I recently stumbled across an academic study that claimed to find a correlation between higher employer contribution rates and leakage. I will confess to a certain skepticism at that finding. There are, after all, a well-established series of things that contribute to leakage, broadly defined as distribution of retirement savings prior to retirement – but employer matching contributions – and certainly more generous matching contributions – have never been on that list. The study – innocuously titled “ Cashing Out Retirement Savings at Job Separation ” – spends most of its 20-odd pages talking about leakage, its impacts on retirement security, and some possible solutions.  That said, one needs read no further than the abstract of this paper to find its surprising conclusion regarding one such underlying cause; its authors “estimate that a 50% increase in employer/employee match rate increases leakage probability by 6.3% at job termination.” More specifically, “The ...