Workers Quick to Cash Out 401k Plans When Changing Jobs
How frequently do employees cash out of their 401k accounts? Too often, according to a study just released by Hewitt Associates.
Hewitt found that 42 percent of workers cashed out of their 401k plans when they changed jobs. The other workers either rolled the money into an IRA (52 percent) or moved their money into their new employers' plans (6 percent). This is an improvement from a previous Hewitt study done in 1999 that found 68 percent of plan participants opted for lump sum cash payments when switching jobs and only 32 percent rolled over the cash. An improvement yes, but still an disquieting number cashing out.
"It concerns us to see how many people are taking their retirement savings in cash," said Stacy Schaus, defined contribution consultant at Hewitt Associates. "When employees cash out of their 401k plan, it can have a devastating affect on their future retirement savings and expose them to significant tax penalties."
What's ironic is that according to a new survey from American Century Investments, when asked what they would do with their 401k retirement savings, only 4 percent indicated they would withdraw the money. Again, what workers say often doesn't match their actions.
Who is Taking Cash Out?
Workers of all ages took distributions in cash from their 401k plans, including those close to retirement. Hewitt's data revealed that more than one-third (39 percent) of employees age 60 and older took their distributions in cash, as did 33 percent of employees age 50 to 59. The highest incidence of cash distributions was among young employees (50 percent) age 20 to 29.
People holding a range of 401k balances, including sizeable sums, took a distribution in cash. Twenty percent of people who had account balances of between $40,000 and $50,000 took a cash distribution, as did 26 percent of workers who had accounts of between $30,000 and $40,000. The majority (72 percent) of people with account balances of between $5,000 and $10,000 took a cash withdrawal from their accounts.
"We continue to be amazed by the number of employees with considerable 401k 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 "Once any sum, large or small, is withdrawn from the plan, it impacts employees' retirement security."
About The Study
Hewitt's analysis of 160,000 employees who took 401k plan distributions in 2002. Hewitt Associates is a global human resources outsourcing and consulting firm.
Rick Meigs, Publisher, 401khelpcenter.com
