Hewitt Study Shows Nearly Half of U.S. Employees Cash Out Their 401(k) Accounts When Leaving Their Jobs
October 28 2009 - 9:00AM
Business Wire
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
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