The likelihood of employees taking a cash distribution from their 401(k) plans when leaving their jobs, rather than keeping the money in the plan or rolling it over to an individual retirement account or a new employer’s retirement plan, is directly related to a worker’s age, according to a study released Wednesday.
A Hewitt Associates Inc. study of 170,000 401(k) plan participants who terminated employment in 2008 found that 46% took a cash distribution, 29% kept the money in their former employer’s 401(k) plan, and 25% rolled the money over into an IRA or a new employer’s retirement plan.
But account balance cash-out rates were far higher among younger and middle-aged employees than for older employees, the study found.
For example, 60% of employees between ages 20-29 cashed out their account balances, while 21% kept the money in the plan, and 18% rolled over the money to an IRA or to a new employer’s retirement plan.
For employees between ages 40-49, 43% cashed out the distribution, 32% left the money in the plan, and 25% rolled it over.
By contrast, only 34% of employees between ages 50-59 cashed out their account balances, 35% left the money in the plan, and 31% rolled it over.
That high cash-out rate among younger employees can mean a big loss of retirement income.
“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,” Pamela Hess, Hewitt’s director of retirement research in Lincolnshire, Ill., said in a statement.
An example provided by Hewitt illustrates this potential loss of retirement income. Assuming a 7% annual rate of return through age 65, a 25-year-old employee who cashes out a $5,000 account balance may be sacrificing $75,000 at retirement, Hewitt estimates.
By contrast, the 25-year-old cashing out the $5,000 account balance would receive—after taxes and penalties—roughly $3,500.
A summary of the study is available at www.hewitt.com.
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