Only six percent of 401(k) plan participants who switch jobs roll their money over to the incumbent 401(k) provider, according to a study. Thirty-seven percent of participants place their savings in an IRA, according to the study by Hewitt Associates, the management consulting firm in Lincolnshire, Ill. Hewitt's analysis of 193,000 defined contribution distributions nationwide in 1998 also showed that 57 percent of the investors chose to cash out of their plans.
In other words, when 401(k) investors switch jobs, mutual fund companies lose assets under management 94 percent of the time, the Hewitt data shows.
This is in accordance with research by Spectrum Group of Oak Brook, Ill., which shows that fund companies lose assets under management 89 percent of the time when people switch jobs or retire. (MFMN, 5/31/99) Spectrum also estimates that fund companies lost management of $288 billion worth of 401(k) assets in 1998 due to people switching jobs or retiring.
However, the 401(k) balances that people are cashing out average $5,000 or less, according to Hewitt. Seventy-eight percent of distributions cashed out were for balances of $5,000 or less, 31 percent were for balances up to $50,000 and 17 percent were for balances of $50,000 or more, according to Hewitt.
The average balance of funds being rolled over to an IRA was $68,000, the data showed. Hewitt did not disclose the average balance of 401(k) plans being rolled over to an incumbent 401(k) plan.
Mike McCarthy, a defined contribution consultant with Hewitt, said mutual fund companies are very concerned about losing nearly $300 billion of 401(k) assets under management annually due to job changes.
One step fund companies are taking to limit the losses is to try to retain their 401(k) money in the old accounts, McCarthy said. Although investors tend to like to consolidate their assets and many resist holding a variety of savings plans, it is possible for an outgoing 401(k) provider with strong name recognition to convince participants to continue to hold their money in that account even after they leave a job offering that plan, McCarthy said.
Many 401(k) plan providers are also trying to convince job switchers to remain with their company by switching their money into an IRA, McCarthy said.
The hardest sell, however, is for an incoming 401(k) provider who has no existing relationship with an investor and whose investor communications are controlled by the employer, to attract the investor's previous savings, Hewitt said.