Retirement Account or Bank Account? Employees Cash Out 401(k)s in Record Numbers

By Patty Kujawa

Feb. 14, 2018

The Bureau of Labor Statistics reports that today’s mobile workforce is changing jobs nearly a dozen times.

For 35- to 44-year-olds, a little over a third take jobs that last less than a year. It doesn’t allow for a lot of time to sock away money in a 401(k) account and as a result, many workers are cashing out what little they have.

It’s a serious problem because too often people don’t realize the whopping penalties or the consequences they face when wiping out retirement savings, said Spencer Williams, president and CEO of financial consulting group Retirement Clearinghouse.

“We need to stop the cash-out syndrome,” Williams said.

It doesn’t seem like companies should care whether a worker leaving a job decides to cash out the money they saved in a 401(k) plan, but studies have shown that people who don’t have enough saved for retirement wind up staying on the job longer and are more stressed about their finances, said Keith Overly, executive director for the state of Ohio Deferred Compensation plan.

Williams added that employers should be asking new hires whether they have a 401(k) from their old job and should try to help with the paperwork that goes into doing the transfer.

“We are all better off if there is not that kind of leakage,” Overly said. “Having a healthy [retirement balance] can be one of the most important benefits for an employee and an employer.”

About 14.8 million, or 22 percent, of active and contributing defined-contribution participants will change jobs each year, according to research from the Employee Benefit Research Institute. Of those job changers, Retirement Clearinghouse reports about 41 percent of these people will cash out of their 401(k).

“Someone with a $15,000 balance doesn’t want to do the work,” to roll the balance over to another retirement savings account, Williams said.

It was important for people to realize the problem, so to bring awareness, Retirement Clearinghouse created the National Retirement Savings Cash Out Clock. It is similar to the national debt clock that ticks away in New York City, but this one is online and focuses on year-to-date cash out and leakage rates from 401(k)s. By the end of 2017, it is expected to hit $68 billion.

If a worker decides to cash out, employers are required to keep 20 percent of the full amount to pay income tax. If the worker is under 59 ½ years old, they pay an extra 10 percent withdrawal penalty as well. According to American Century Investments Cash Out Calculator, a 29-year-old cashing out a $25,000 account would walk away with $18,000. Had they kept it in a 401(k) returning about 7 percent a year on investments, the calculator shows that money would grow to $285,599 at age 65.

“This can be a big problem for people,” Overly said. Retirement plans “aren’t supposed to be used like bank accounts.”

Surprisingly, only 37 percent of cash outs were for economic emergencies, according to a 2015 survey by Boston Research Technologies. Williams added that often people cash out simply because it was the easier route for the person at the time.

“The best choices are not always the easiest choices,” he said.

Overly said participants in his plan need to talk to management when cashing out. That provides an opportunity to make sure the person is aware of what they are doing.

“In some cases there may be some valid reasons, but your retirement plan should be your last resort,” Overly said.

Williams suggested companies should make it easier for new employees to roll over accounts from their old job to their new one. Retirement Clearinghouse is working with the Labor Department to make 401(k) plans automatically portable to a new employer. This way, 401(k) accounts would automatically follow a worker to a new job and get rolled into that company’s plan.

For the most part, rollovers are allowed today, but the process isn’t automatic or easy. In addition, it normally requires a good bit of paperwork for the participant, Williams said.

“By law, it is portable but in practice, people are left to do this on their own. This has lead to a severe amount of cash outs,” Williams said. “We’re never going to stop all of this, but implementing a program to help employees bring the money with them should help.”

Patty Kujawa is a writer in the Milwaukee area. Comment below or email

Patty Kujawa is a freelance writer based in Milwaukee.

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