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New Leeds research explains why professionals raid retirement plans when they leave their employers.鈥�

The retirement savings crisis in the United States has plenty of culprits.听

John Lynch has found one in a very unlikely place.听

As 401(k) plans replaced pensions, employers started matching employee contributions to their future retirements. It turns out that the more generous an employer鈥檚 match is, the more likely employees are to withdraw money from the plan when they leave a job, instead of waiting until retirement.听

That greatly diminishes their savings while incurring hefty penalties鈥攁nd no one is paying attention to the financial welfare of those professionals as they head out the door.听

鈥淲hen you go to leave your job, and you鈥檙e presented with this option to cash out, you鈥檙e more likely to think of it as free money, since your employer contributed so much to it,鈥� Lynch said, noting it鈥檚 a mix of employee psychology and employer bureaucracy that encourages professionals to take the money and run.

Lynch, a distinguished professor of marketing at Leeds and the current executive director of the Marketing Sciences Institute, is no newcomer to problems around retirement savings. Upon arriving at Leeds in 2009, he helped create the Center for Research on Consumer Financial Decision Making, which hosts an annual conference in Boulder featuring thought leaders in industry and academia.

In one such conference, a presentation looked at leakage from retirement accounts鈥攖he kind of emerging topic the event welcomes鈥攁nd Lynch was intrigued.听

鈥淚t was the first I鈥檇 heard of it,鈥� he said, 鈥渁nd it sounded pretty bad.鈥澨�

Compounding effect of early withdrawal

Research has already turned up some sobering figures about American retirement investing. Of every dollar that makes its way into a 401(k) plan, 40 cents is withdrawn early. Not only is that subject to taxation and an IRS penalty, but people who withdraw lose the compounding effect that retirement savings can generate during the 40-plus years a person is working.

Lynch worked on the problem along with co-authors Yanwen Wang鈥攏ow with the University of British Columbia, previously on the Leeds faculty鈥攁nd Muxin Zhai, a Leeds post-doctoral researcher now with Texas State University. 听They studied three years鈥� worth of data and discovered the correlation between the generosity of employer matching and the likelihood of money being withdrawn at termination. Their analysis found 41.4 percent of employees withdrew money when they left their jobs鈥攚ith most emptying their accounts.听

The authors鈥� findings were featured earlier this month in that assessed motives for cashing out early and showcased steps employers can take to help employees when they leave a job.听

The study controlled not only for the size of an employee鈥檚 account, but their age, gender, income level and other factors. And while the authors weren鈥檛 able to identify the cause of each employee鈥檚 departure鈥攊n case being laid off, as opposed to taking a new position, influenced whether to withdraw money鈥攖hey did look at months with high layoffs to see if there was a spike in withdrawals. For instance, during the worst of the pandemic, 1 in 6 Americans had some period of joblessness, but there was no change in the amount of leakage; in fact, research by a financial services company found the percent cashing out when leaving a job decreased very slightly during the pandemic.听

鈥淲e鈥檙e not saying none of that leakage is due to need, but there鈥檚 a huge chunk that鈥檚 just psychology,鈥� Lynch said.听

Seeking simple solutions

A lot of Lynch鈥檚 past work in this arena considers the benefit of financial education, especially when that intervention takes place just before the time when you鈥檙e trying to influence behavior. When it comes to job separation, there鈥檚 usually an exit interview process, but retirement payouts typically are discussed only in a form letter from the financial services firm the employer pays to manage its plan.听

It鈥檚 a vexing problem, but Lynch said he believes there鈥檚 a simple solution.听

鈥淭here鈥檚 no one sitting there at the point where you鈥檙e changing jobs to say, 鈥楥an I help you understand your options?鈥欌�� Lynch said. 鈥淚t鈥檚 in an employer鈥檚 interest to do this鈥攜ou want your workers to be able to enjoy retirement, otherwise you wouldn鈥檛 have given them that generous match.鈥澨�

Lynch said he hopes this research gets employers to have those conversations with workers on their way out, and perhaps introduce some friction when people lean toward cashing out. There may even be direct benefits for employers鈥攆or instance, if a worker who resigns elects to keep her account in the employer鈥檚 plan, the employer may get better rates from plan administrators.

鈥淭here are some bumps in the road, in terms of maybe setting up a Roth IRA where you can鈥檛 stay in the plan or roll over to a new one. The default option can鈥檛 be to put this pile of money in front of you and let you smell it,鈥� Lynch said. 鈥淏ecause once you do, you鈥檙e going to take it.鈥澨�

鈥淐ashing Out Retirement Job Savings at Job Separation鈥� has been , and will appear in a forthcoming print edition of the journal.

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