Nevin's Data "Points"

An update of a so-called “study” has been making the rounds—again—and its authors have doubled-down (and then some) on the assumptions in an updated version. I’m referring to something called “ The True Cost of Forgotten 401(k) Accounts (2023) ”—an update to a report circulated about a year ago of the same title (sans the “2023” qualifier) by a firm called Capitalize. The first report claimed that there was $1.35 trillion in “forgotten” 401(k) accounts—the latest iteration has upped that number to $1.65 trillion. That’s right, $1.65 TRILLION. Not that the report’s authors make it hard to be incredulous about their results. Their executive summary claims that a full 25%—that’s a full QUARTER—of all 401(k) plan assets are, by their definition, “forgotten.” And if you’ve ever “left behind” a 401(k) account at a previous employer—well, apparently you’ve “forgotten” that account by their definition.   Now if that definition of “forgotten” winds up being more cr...

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 ...

 The academics are at it again. In a paper provocatively titled “The Life-Cycle Model Implies that Most Young People Should Not Save for Retirement” no fewer than four of them take 48 pages to make that case. The “trade press” breathlessly intoned “ Most Young People Should Not Save For Retirement in Their 401k ,” “ Many young people shouldn’t save for retirement, says research based on a Nobel Prize–winning theory ,” “ Under 35? Don’t Save For Retirement Yet, These Experts Say ,” “ Economists Say Enjoy Your Youth and Save Later .” At least one had the temerity to offer a contrasting viewpoint (see “ A New Paper Says Young People Shouldn't Save for Retirement. Advisors Disagree ”), while The Street at least called it out as “ This May Be the Worst Financial Advice Ever Shared .” Like most research, the conclusion is a premise based on assumptions. Here the most basic is that this thing called a “life-cycle model” is worth considering in the first place. Now, granted, it’s t...

Thanks to their mother, my kids have grown up with a variety of pets in our house—but none more bizarre than our experience with… a chicken. My son’s elementary school class had been exposed to the miracle of life over the course of several weeks by watching a set of chicks spring forth from eggs that had been carefully tended by the class. Once hatched and ready to be turned loose, the teacher offered to let selected children take one home—provided they obtained their parent’s permission, of course. My son was smart enough to ask his mother—who, seeing how much it meant to him—and much to my amazement, acquiesced to the request.  And so “Grr” [i]  entered our lives. Mind you, we were living in a residential neighborhood in Connecticut at the time, miles and miles from anything remotely resembling a farm. That said, the little peeping chick was adorable, and my wife persuaded me that, as the chick grew we’d be able to erect a small pen in the back yard. We even...

Earlier this year, I commented that it would be interesting to see how expanded access to hardship withdrawals might impact that activity. Now we have some answers. There’s more than a little irony in a legislative body that has long bemoaned both the paucity of retirement savings and the nefarious impact of “leakage” (pre-retirement withdrawal of retirement savings) opening those floodgates a little wider – but mostly the new law, and clarifying regulations [i]  seemed to provide plan sponsors a bit more flexibility in administering these programs, some welcome latitude in helping their workforce navigate choppy financial waters. What remained unknown was – would participants take advantage – or, more precisely, would they abuse the privilege. The first sign – and it was a bit of an eye-opener – came from Fidelity who, in a white paper , claimed to have seen a shift in participant behavior. Not in the percentage of participants taking loans and hardships over...

Did you hear the one about loan defaults adding up to $2.5 trillion in potential retirement savings shortfalls over the next 10 years? How about the “$210 Billion Risk in Your 401(k)”? Those reports were based on an “analysis” by Deloitte that claims to find that “…more than $2 trillion in potential future account balances will be lost due to loan defaults from 401(k) accounts over the next 10 years…” That’s right, $2 trillion lost “due to loan defaults” (the Wall Street Journal  apparently picked the figure that matched the impact on a “typical 401(k) borrower” – more on that in a minute). Now, when you see headlines putting a really big number on what you already suspect is a problem – in this case “leakage” – roughly defined as a pre-retirement withdrawal of retirement savings – well, you could hardly be blamed for simply accepting at face value the most recent attempt to quantify the impact of the problem. A closer look at the assumptions behind that analy...

Most people view automatic enrollment in a 401(k) as a good thing 1  – but apparently it has a heretofore unappreciated “dark” side. At least that was the focus of a headline in a recent Wall Street Journal article  (subscription required) that asked (and answered) the provocative question: “401(k) or ATM? Automated Retirement Savings Prove Easy to Pluck Prematurely.” That is at least how the Journal chose to position its coverage of a study based on a single firm’s experience with automatic enrollment. That study , according to the Journal , serves to “answer a question that has long concerned employers that put workers into 401(k) plans and give them the option to drop out, rather than requiring them to sign up on their own: Will auto-enrolled workers treat their 401(k)s like automated-teller machines?” Now, I’ve heard a lot of questions over the years from plan sponsors about automatic enrollment – but never that one. Regardless, the Journal says ...

Last week I highlighted three “myths” about the retirement system that will not die — all the more distressing because they are perpetuated by retirement industry pundits. Here are three more that (mostly) aren’t perpetuated by those who actually work with retirement plans, but by academics.  Academics who, sadly, are often listened to, and cited by those who regulate and legislate these programs. The Match Doesn’t Matter This doubtless comes as a surprise to those of us who work with retirement plans and retirement plan participants. More precisely, there are a few studies out there that suggest that a matching contribution doesn’t have a very strong impact on participation . The study that is cited most often in support of this one is one conducted several years ago in conjunction with H&R Block, where individuals were offered a financial incentive to take their tax refund and deposit it in an IRA . Most didn’t — and thus the notion that the promise of the match doesn’t...

It has become something of an article of faith in our industry that “leakage,” the distribution of money from retirement accounts prior to retirement, is bad. Bad, of course, in the sense that those “premature” withdrawals, via hardship withdrawals, loans or the so-called “deemed distributions” that result when a termination occurs when a loan is outstanding, reduce individual retirement savings. So when the Center for Retirement Research at Boston College published a paper last week entitled “The Impact of Leakages on 401(k)/IRA Assets,” it really wasn’t a question of “if” there was an impact, it was a question of how much. The answer, according to the paper: a reduction in wealth at retirement of a jaw-dropping 25%. Now by any measure, a 25% reduction in retirement wealth is a massive problem — and one that would, if valid, call for the kind of countermeasures touted by the Boston College researchers. But consider the findings published recently by the non-partisan Employ...

This may be the time of year when thoughts turn to stockings hung by the chimney with care, but it’s also the time of year when parents have to deal with assembling some of the things in those packages. And while Santa may have elves on staff to undertake the construction of a tricycle, dollhouse or Little Tykes airplane seesaw, in our house, that "elf" was named “Dad.” A painful lesson learned over those years was the importance of following the instructions. No matter how self-evident the process appeared at the outset, or how much I thought I remembered assembling something similar in the not-too-distant past, lurching ahead and tackling things in the order I thought made most sense was inevitably a formula for disaster. And then there was the year some miscreant had apparently “liberated” the assembly instructions from the package. Since it was Christmas Eve by the time I discovered this, all I had to go by was common sense and the picture of the finished product on the...

My first car wasn’t anything special, other than it was my first car. It was an older model Ford, ran reasonably well, with one small problem— it went through oil almost as quickly as it did gasoline. At first I attributed that to being a function of the car’s age, but as the leakage grew, I eventually dealt with it by keeping a couple of quarts of oil in the trunk “just in case.” Eventually, I took the car to a dealership—but by the time they finished estimating the cost of a head gasket repair, let’s just say that, even on my limited budget, I could buy a LOT of oil by the quart, over a long period of time, and still be ahead financially. “Leakage”—the withdrawal of retirement savings via loan or distribution prior to retirement— is a matter of ongoing discussion among employers, regulators, and policy makers alike. In fact, EBRI Research Director Jack VanDerhei was recently asked to present findings on “The Impact of Leakages on 401(k) Accumulations at Retirement Age” to the ERISA...

This is the time of year when many people both look back at the year just past—and ahead to the next with a fresh perspective. It’s also that time of year when many make lists. So, whether you’re looking to make some New Year’s resolutions, or just looking to improve your overall financial situation, here are 10 things to check off your 2013 list—and that can get your 2014 list off to a strong start. Deal with debt (see Savings Resolutions for the New Year ). Establish a savings goal for retirement (see Estimate “Ed” ). Save for retirement—at work, or on your own (see Saving for Retirement Outside of Work ). Save early so that your savings can work for you (see The “Magic” of Compounding ). If you do have a retirement plan at work, make the most of it (see Making the Most of your Retirement Plan ). Maximize your savings—see if you’re eligible for the Savers’ Credit (see Credit Where Credit is Due ). See if a Roth 401(k) makes sense for your situation (see To Roth or Not...

A couple of months back, my wife noticed a water spot on the ceiling of our dining room. Now, it didn’t look fresh, but considering that that ceiling was directly underneath the master bath, she had the good sense to call a plumber. Sure enough, there was a leaky gasket—and from the look of it, one that had been there for some time before we took ownership. Fortunately, the leak was small, and the damage was minimal. Even more fortunately, we took the time to have the plumber check out the other bathrooms, and found the makings of similar, future problems well before the “leakage” became serious. Homes aren’t the only place with the potential for problems with leakage. A recent report on 401(k) loan defaults suggests that “leakage”—the money being drawn out of retirement plans prior to retirement —is a lot larger than a number of industry and government reports have indicated. In fact, the report ( online here ) claims that “the leakage could be as high as $37 billion per...

The headlines last week were all about how new legislation had been introduced to cut down on the “leakage” from 401(k) plans. That leakage, roughly defined as pulling money out of retirement savings before retirement, has been a concern of many for some time. About once a year, someone puts out a report about the number of outstanding loans from these programs and/or the uptick in hardship withdrawals (see IMHO: Double Dipping ) ; and, from 2008, see IMHO: Safety “Net” ). Not surprisingly, with the sluggish U.S. economy and the so-called jobless recovery, people seem to be dipping into these accounts at higher rates. And yet, for all the hyperbole around such things, the actual rate seems to be pretty consistent (allowing for differences in the data samplings). That said, last week, Senators Herb Kohl (D-Wisconsin) and Mike Enzi (R-Wyoming) introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (the SEAL Act), which, among other things, was designe...