Notwithstanding the advice to the contrary that many plan sponsors provide, Hewitt?s analysis of 401(k) plan participants aged 20-59 shows that more than two-thirds – 68% – opt for cash payments when changing jobs. Less than one-third (26%) roll their balances into IRAs and only 6% move their money to their new employers? plans.
“It?s troubling to see that many 401(k) plan participants are making costly mistakes,” said Mike McCarthy, 401(k) consultant, Hewitt Associates. “Whether it?s using the money to buy a new car, take a vacation or pay off credit cards, 401(k) participants are losing out in the long run.”
Of course, some participants may later roll over the cash, although they face a mandatory 20% withholding at that time. Also, participants often face hurdles when trying to roll over a 401(k) balance to a new employer’s plan or to an IRA.
Hewitt also found that the smaller the balance, the more likely the participant will opt for the cash payment. This applies among all age groups. For balances of $3500 or less, a large majority of each age group takes cash payments:
- 80% of the age group 50-59
- 84% of the age group 40-49
- 85% of the age group 30-39
- 88% of the age group 20-29
The Hewitt 401(k) Rollover Distribution Analysis represents nearly 170,000 defined contribution plan distributions for participants age 20-59 in 1999.
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