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July 27, 2005
Nearly Half of Departing Workers Cash Out Their 401(k) Plans

Despite the growing need for employees to save for retirement, a significant number of workers participating in 401(k) plans cash out of them once they leave their company, according to new data from Hewitt Associates, an HR consulting firm.

Hewitt says its study of nearly 200,000 workers who participated in their companies' 401(k) plans found that 45 percent elected to take a cash distribution upon leaving their jobs. The remainder either kept their savings in their current employer's 401(k) plan (32 percent) or rolled the money over to a qualified IRA or other retirement plan (23 percent).

"Retirement security relies not only on employees saving in their 401(k) plan, but on them actually preserving their retirement wealth when they leave their company," said Lori Lucas, director of participant research at Hewitt Associates. "Our findings show that too many workers are not looking at their 401(k) savings as long-term in nature, but are instead using termination of employment as an opportunity to spend this money.

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"With fewer workers tending to remain at one company until retirement," Lucas continued, "employees may become 'serial consumers' of their 401(k) savings, which can have serious consequences when it comes to their ultimate ability to reach their retirement goals."


Age factors into cash-out decisions

Hewitt's study shows a direct correlation between age and tenure and employees' decisions to cash out of their 401(k) plans. The highest incidence of cash distributions was among young employees (66 percent), defined as those between the ages of 20 and 29. Older, more tenured employees were more likely to preserve their retirement wealth, either keeping their assets in their current employer's plan or rolling it over. Still, more than 42 percent of workers age 40-49 elected to cash out of their 401(k) plans upon leaving their jobs.

"It's disconcerting to see that a number of middle-aged workers still elected to cash out of their 401(k) plans when changing jobs," said Lucas. "It shows that many workers who are closer to retirement can be tempted to consume rather than save when they get the chance. By doing so, they are exposing themselves to significant taxes and possible penalties, and therefore may face having to work longer to make up the savings they lost when they cashed out."


Employees with smaller balances more likely to cash out

Not surprisingly, Hewitt's study showed that size of balance was a factor when it came to workers' tendencies to cash out of their 401(k) plans. Nearly three-quarters (72.5 percent) of workers with 401(k) plan balances under $10,000 took a cash distribution. When 401(k) plan balances were between $10,000 and $20,000 at termination, cash-out rates were much lower. Still, nearly a third (31 percent) of these employees elected to take their 401(k) distribution in cash.

"It's disturbing to find that nearly a third of workers with 401(k) balances of this size aren't taking steps to preserve it for the future," said Lucas. "In these cases, employers need to stress the value of compounding, which can be a very powerful tool in showing employees how small balances can make a big impact on their retirement savings. For example, if a 40-year-old employee with a $10,000 balance earned a 7 percent annual return, the money would grow to more than $50,000 by the time he or she retired at age 65."

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