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CCH® PENSION — 11/18/09

Nearly half of employees continue to cash out their 401(k) plans when they leave their job, Hewitt survey finds

A Hewitt survey of 170,000 401(k) participants who terminated employment during 2008 found that the number of workers who took a cash distribution from their 401(k) plan when they left their job was "alarmingly high" —46% —and has remained virtually unchanged since 2005. The survey found that the remainder of employees either rolled over their money to an IRA or other retirement plan (25%) or kept their savings in their prior employer's 401(k) plan (29%).

A similar Hewitt analysis conducted in 2005 revealed almost identical results: 45% of workers took a cash distribution, 23% rolled over their savings to an IRA or other retirement plan and nearly a third (32%) 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," said Pamela Hess, Hewitt's director of retirement research. "But," she added, "employees don't seem to be getting the message."

Younger employees, those with smaller balances more likely to cash out

Hewitt's study shows that younger workers and those with smaller account balances were more likely to cash out their 401(k) accounts.

The majority (60%) of employees in their 20s took a cash distribution compared to just one-third (34%) 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," said Hess.

Hewitt's analysis also found a direct correlation between 401(k) plan balances and cash-out rates. Only 8% of employees with plan balances of $100,000 or more cashed out, and less than one in five workers (17%) with plan balances between $20,000 and $99,999 did so. However, nearly half (45%) of employees with balances between $1,000 and $5,000 took a cash distribution and 85% of those with balances under $1,000 cashed out either voluntarily or due to force-out provisions.

Recommendations to decrease cash outs

Hewitt offered four ways policymakers and employers can discourage workers from cashing out their 401(k) balances:

(1) Limit access to retirement monies at termination. Legislation could be enacted that would delay workers' ability to cash out their 401(k) plan until age 59 1/2, Hewitt said. Until that age, employees would either be able to leave their savings in their prior plan, or roll over their money into another 401(k) plan or into an IRA.

(2) Promote education and communication with employees on the negative effects of taking a cash distribution. Participant web sites should promote information about the long-term consequences of cashing out a 401(k) plan, Hewitt recommended.

(3) Offer more institutional funds. According to Hewitt's analysis, nearly 60% of assets from terminated employees remained in 401(k) plans when the majority of investment options offered were institutional funds (non-mutual funds).

(4) Simplify the rollover process. Instead of the long, paper-intensive procedure currently in place, companies could adopt a web-based, paperless rollover process. Doing so, said Hewitt, would eliminate much of the confusion and frustration many employees feel when trying to roll over their assets into another qualified plan or into an IRA.

Source: Hewitt Associates press release, October 28, 2009.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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