Generous to a Fault? The Effect of Generosity of Employers’ Retirement Plan Contributions on Leakage from Cashing Out at Job Separation

63 Pages Posted: 1 Jan 2020

See all articles by Yanwen Wang

Yanwen Wang

University of British Columbia (UBC)

Muxin Zhai

Texas State University

John G. Lynch

University of Colorado-Boulder, Leeds School of Business - Center for Research on Consumer Financial Decision Making

Date Written: December 2, 2019

Abstract

The US government imposes a 10% tax penalty to discourage pre-retirement leakage -- cash withdrawal from 401(k) retirement savings. We investigate the impact of employer matching contributions on leakage at job termination. In our unique data set with 597,980 employees covered by 29 retirement plans, 38% of employees leaked by cashing out 401(k) savings at job termination. Increasing the generosity of the employer/employee match rate increases retirement balances, reducing leakage. It also increases the proportion of one’s balance contributed by the employer, increasing leakage. We interpret the latter effect as showing that employees are more likely to frame their retirement accounts as a rainy-day fund rather than a lock box of untouchable retirement savings when their employer contributed a greater proportion of the balance. We estimate that a 50% increase in employer/employee match rate would increase leakage probability by 14.5% at job termination. However, there could be an 11.2% reduction in leakage probability if employees ignore the extra incentive generated by the framing effect. Approximately 20% of accumulated assets from a 50% increase in match rate would leak out of the system due to framing bias attributable to the percent of assets contributed by employer.

Suggested Citation

Wang, Yanwen and Zhai, Muxin and Lynch, John G., Generous to a Fault? The Effect of Generosity of Employers’ Retirement Plan Contributions on Leakage from Cashing Out at Job Separation (December 2, 2019). Available at SSRN: https://ssrn.com/abstract=3497140 or http://dx.doi.org/10.2139/ssrn.3497140

Yanwen Wang (Contact Author)

University of British Columbia (UBC) ( email )

Vancouver, BC
Canada

HOME PAGE: http://https://www.sauder.ubc.ca/people/yanwen-wang

Muxin Zhai

Texas State University ( email )

TX
United States

John G. Lynch

University of Colorado-Boulder, Leeds School of Business - Center for Research on Consumer Financial Decision Making ( email )

Leeds School of Business
Boulder, CO 80309-0419
United States
919-971-5201 (Phone)

HOME PAGE: http://https://www.colorado.edu/business/john-g-lynch-jr

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