Hewitt: Many Employees Elect 401(k) Cash When Changing Jobs

November 5, 2003 (PLANSPONSOR.com) - While rolling 401(k) dollars into an Individual Retirement Account (IRA) is the most popular route to take when changing jobs, a fairly large portion are taking the cash-out option.

Overall, 52% of the 160,000 participants taking 401(k) plan distributions polled opted for rolling the money into an IRA, compared with only 6% who moved the money into their new employer’s plans. However, it is the 42% who selected to take the money and run that most bothers Hewitt Associates, the sponsors of the survey.

“When employees cash out of their 401(k) plan, it can have a devastating affect on their future retirement savings and expose them to significant tax penalties. They may be using their retirement savings for current expenses such as new purchases, vacations or to pay off credit card bills instead of saving for the long term,” says Hewitt defined contribution consultant Stacy Schaus.

Particularly ominous to Hewitt if is the large percentage (39%) of workers over the age of 60 that took the cash-out option, coupled with the 33% of workers between the ages of 50 and 59.“It’s troubling to see that older workers are making the same cash-out mistakes as younger employees who have a longer time horizon to retirement,” said Schaus. Hewitt’s data shows the highest incidence of cash distribution was the 50% among employees age 20 to 29.

“For many employees, the 401(k) plan is the primary source of income for retirement. Without this source of income, older employees may face working longer than expected to make up the savings they lost when they cashed out. Younger workers are a concern, as well, because they are more likely to work at a series of companies. If they cash out each time they change jobs, they are losing some of the most powerful years to grow their retirement security.”

Per Plan Size

Even though the incidence of a 401(k) cash out declines as the balance goes up, Hewitt found no plan size was immune from the potential for this action. By far though, the largest instance (72%) of a cash contribution came from plans with balances between $5,000 and $10,000, compared with only 24% of these participants electing to roll the balance into a an IRA and 4% moving the money into their new employer’s plan. This was followed by the cash-out elections from:

  • 45% of participants with a balance between $10,000 and $19,999
  • 32% of participants with a balance between $20,000 and $29,999
  • 26% of participants with a balance between $30,000 and $39,999
  • 20% of participants with a balance between $40,000 and $49,999
  • 17% of participants with a balance between $50,000 and $59,999.

All of this culminates with only 6% of participants with a balance greater than $100,000 taking a cash distribution, compared to 90% selecting an IRA rollover.

“We continue to be amazed by the number of employees with considerable 401(k) balances who are taking their distributions in cash because that money isn’t going to be used for its intended purpose -building retirement income,” said Schaus. “Once an sum, large or small, is withdrawn from the plan, it impacts employees’ retirement security.”