Plan churn quietly multiplies the 401(k) leakage problem

Plan churn is a second, quieter front in the fight against retirement savings leakage, and the arithmetic Tom Hawkins lays out for 401(k) Specialist should put it on every plan sponsor's agenda. The average 401(k) participant holds roughly 9.9 jobs over a working career, and an estimated 14.8 million defined contribution participants—about 17% of the active base—change jobs each year. On top of that mobility, Hawkins calculates, 4.2 million participants a year sit in plans that change recordkeepers and 1.9 million sit in plans that terminate, which means 6.1 million participants, roughly 7% of active participants, go through plan churn annually. Drawing on DOL Form 5500 records and practitioner estimates, he argues that those employment changes, combined with weak plan-to-plan portability, are the single greatest trigger for retirement savings leakage.

Plan churn has none of the drama of a cash-out election, which is precisely why it is dangerous. The participant makes no choice; the employer changes vendors or closes the plan, and the individual is left to relate to an old account through a system adopted after they left. Recordkeeper transitions get visible project management for active participants: accounts migrated, websites changed, communications redirected. Former employees may no longer receive company mailings at all, and they may have changed addresses or email accounts years earlier, so each conversion can make the historical records they need harder to reach. Because practitioners estimate that large plans review or replace recordkeepers every seven to ten years, the effect compounds. A worker who changes employers ten times and leaves balances behind can end up not only with multiple former plans but with several generations of recordkeeper conversions inside those plans, each one capable of loosening the connection to money that has not been touched in years.

As Hawkins notes, the system already makes cashing out easy and moving retirement savings forward difficult, and plan churn adds a fresh obstacle for a balance that may have sat untouched since a prior job. Sponsors should therefore read their next recordkeeper RFP as a leakage document, not a fee agreement. A plan that requires outgoing and incoming vendors to locate terminated participants, say in plain terms where their money is going, and keep a trail from one system to the next is treating plan churn as part of the retirement outcome. Recordkeeper changes and plan terminations are facts of the defined contribution system; whether the dollars left behind survive them is partly a decision the plan makes in the contract.