Almost Half of Departing 401(k) Participants Still Cashing Out

A Hewitt Associates news release about its 401(k) distribution study said the 46% figure for 2008 has remained virtually unchanged since 2005.

The study of 170,000 401(k) participants who left their jobs in 2008 shows that the remainder either rolled over their money to a qualified IRA or other retirement plan (25%) or kept their savings in their ex-employer’s plan (29%). The 2005 study showed 45% of departing workers took a cash distribution, 23% rolled over their savings to a qualified IRA or other retirement plan, and 32% left their money in the plan.

Younger workers are more likely to cash out than their older counterparts. Sixty-percent of employees in their 20s took a cash distribution compared to 34% of those in their 50s, according to the analysis.

“Particularly during the economic downturn, employers and financial advisers have been increasingly vocal about the negative impact that cashing out of a 401(k) plan has on retirement savings,” asserted Pamela Hess, Hewitt’s director of retirement research. “But employees don’t seem to be getting the message. In a society where less than one in five workers will likely be able to meet their needs in retirement, employers and policymakers need to work together to implement solutions that change employee behaviors and reduce cash-out rates. Otherwise, millions of Americans who rely on defined contribution plans will find themselves unable to achieve a financially secure retirement.”

Hewitt pointed out that cashing out employees end up being able to access a comparatively small amount of the money because of taxes and penalties and, because of compounding, end up with a significantly smaller nest egg at retirement.

For example, an employee who cashes out $5,000 from a retirement plan at 25 may potentially be sacrificing $75,000 at retirement, yet he or she only receives a small amount- perhaps only $3,500-from the cashout, Hewitt said.

According to the news release, the analysis also found a direct connection between 401(k) plan balances and cashout rates.

Only 8% of workers with plan balances of $100,000 or more cashed out, and 17% with plan balances between $20,000 and $99,999 did so. Conversely, the number of cashouts among employees with smaller balances is much higher. Almost half (45%) of workers with balances between $1,000 and $5,000 took a cash distribution, while 85% of those with balances under $1,000 cashed out either voluntarily or due to force-out provisions.

The Government Accountability Office (GAO) asserted in a recent study that Treasury and Labor Department regulators should encourage sponsors to provide participants with more detailed information including various financial scenarios to amply illustrate the potential negative effects on the person's ultimate retirement account balance of taking loans or accepting a final account cashout (see Sponsors Need To Plug Leaks for Loans, Withdrawals ).