The "Hassle" Factor

Much is made these days of the application of behavioral finance and the implications for plan design, as well as the role of choice architecture in helping workers make “better” (if not more informed) benefit decisions.  Valuable as these insights have been, I think much of human behavior (or lack thereof) in these matters can be more simply explained.

What’s at work is a concept a friend of mine described to me more than 20 years ago – something he called “the hassle factor.”  It was a philosophy he routinely applied in many aspects of his personal and professional life.  Simply stated, presented with a choice between doing something that is hard, time-consuming, complicated, or even inconvenient, and doing something else, my friend – and, in fairness, human beings generally seem to be – inclined to opt for the latter.

Of course, the “hassle factor” CAN be trumped by exterior needs or forces, as anyone who has endured the long lines at the DMV or sat through the background music on an interminably long customer service line can attest.  That said, things like an unduly complicated 401(k) enrollment form/process can certainly serve as a barrier to plan entry, and there’s every reason to expect that the same might apply when it comes time to exit the plan.

Job change is a point in time at which a lot of important decisions are made—some voluntary and some forced upon us—and the disposition of one’s retirement savings account certainly looms large among them.  A recent EBRI Notes article examined what workers age 50 and above did with their defined contribution account balances at the point of job change, looking at data from the Health and Retirement Study (HRS), a study of a nationally representative sample of U.S. households with individuals age 50 and over.  EBRI analyzed responses from 2008 and 2010 for this study.

In terms of demographic characteristics, no significant difference was found between men and women in terms of their DC account balances and what they chose to do with them at job change.  And while married or partnered individuals were less likely to withdraw their assets and more likely to roll them over into an IRA than singles, the differences were small.

The EBRI analysis did find that a decision to take a withdrawal in cash declined with higher account balances, higher incomes, existing ownership of an IRA, and higher financial wealth. Not surprisingly, the decision to cash out rose with individual debt levels.

However, among those who left their employer but remained in the workforce, the most common outcome was to leave their retirement account balance with their prior employer’s plan.  The EBRI report notes that, unlike the outcomes detailed above, there was no clear trend between the financial variables, and the decision to leave those DC balances in the prior employer plans.

As for what might explain that outcome, the report noted that it might simply be a decision to postpone taking the money until it was needed, or that there “may be behavioral factors, such as inertia, driving what might be seen as a ‘non-decision.’”

Or, as my friend might have been inclined to say, a non-decision based on the “hassle factor.”

• Nevin E. Adams, JD

“Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” is published in the EBRI May Notes, available here.