A Hewitt Associates news release said that 45% of the nearly 200,000 K plan participants studied took a cash distribution upon their departure, while 32% stayed in the plan and 23% rolled over into another qualified plan or an IRA.
The Hewitt data found a direct correlation between age and tenure and employees’ decisions to cash out of their 401(k) plans. The highest incidence of cash distributions was among young employees (66%) age 20 to 29. Older workers with more years of service were more likely to keep their assets in the plan or roll over to another plan or IRA. Still, more than 42% of workers age 40-49 elected to cash out of their 401(k) plans upon leaving their jobs.
Not surprisingly, Hewitt’s study showed that size of balance was a factor when it came to workers’ tendencies to cash out of their 401(k) plans. Nearly three-quarters (72.5%) of workers with 401(k) plan balances under $10,000 took a cash distribution. When 401(k) plan balances were between $10,000 and $20,000 at termination, cash-out rates were much lower. Still, nearly a third (31%) of these employees elected to take their 401(k) distribution in cash.
“Retirement security relies not only on employees saving in their 401(k) plan, but on them actually preserving their retirement wealth when they leave their company. Our findings show that too many workers are not looking at their 401(k) savings as long-term in nature, but are instead using termination of employment as an opportunity to spend this money,” said Lori Lucas, Hewitt director of participant research in the news release. “With fewer workers tending to remain at one company until retirement, employees may become ‘serial consumers’ of their 401(k) savings, which can have serious consequences when it comes to their ultimate ability to reach their retirement goals.”