HEW Hewitt Associates

Increased efforts to caution Americans about the negative financial consequences of cashing out their 401(k) plans have had little impact in changing their behavior over the past few years, according to a new study by Hewitt Associates, a global human resources consulting and outsourcing services company. In fact, the number of workers who took a cash distribution from their 401(k) plan when they left their job was alarmingly high—46 percent—and has remained virtually unchanged since 2005.

Hewitt’s study of 170,000 401(k) participants who terminated employment during 2008 shows that the remainder of employees either rolled over their money to a qualified IRA or other retirement plan (25 percent) or kept their savings in their prior employer’s 401(k) plan (29 percent). A similar Hewitt analysis conducted in 2005 revealed almost identical results: 45 percent of workers took a cash distribution, 23 percent rolled over their savings to a qualified IRA or other retirement plan and nearly a third (32 percent) left their money in their prior employer’s 401(k) plan.

“Particularly during the economic downturn, employers and financial advisors have been increasingly vocal about the negative impact that cashing out of a 401(k) plan has on retirement savings,” explains 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.”

Younger Workers More Apt to Cash Out

Hewitt’s study shows that younger workers are more likely to cash out their 401(k) account than those who are older and more tenured. Six in ten (60 percent) employees in their 20s took a cash distribution compared to just one-third (34 percent) of those in their 50s.

“The high cash-out rate among young and middle-aged workers is troublesome because these employees are missing out on the opportunity for decades-worth of tax-deferred growth on their investments. Over the course of 20 or 30 years, modest amounts of savings can turn into surprisingly large sums of money,” says Hess.

For example, an employee who cashes out $5,000 from his or her retirement plan at age 25 may potentially be sacrificing $75,000 at retirement1, yet he or she only receives a small amount—perhaps only $3,500—from the cash out due to taxes and penalties.

401(k) Cash Out Rates by Age

Age   Cashed Out   Left Money in Plan   Rolled Over 20-29   60%   21%   18% 30-39   47%   30%   23% 40-49   43%   32%   25% 50-59   34%   35%   31% 60-65   31%   32%   38% 65+   31%  

32%

  37%      

Account Balance Heavily Influences Cash Out Rate

Hewitt’s analysis also found a direct correlation between 401(k) plan balances and cash-out rates. Just 8 percent of workers with plan balances of $100,000 or more cashed out, and less than one in five workers (17 percent) with plan balances between $20,000 and $99,999 did so.

Conversely, the number of cash outs among employees with smaller balances is much higher. Almost half (45 percent) of workers with balances between $1,000 and $5,000 took a cash distribution. Eighty-five percent of those with balances under $1,000 cashed out either voluntarily or due to force-out provisions.

401(k) Cash Out Rates by Plan Balance

Balance   Cashed Out   Left Money in Plan   Rolled Over