Many people who change jobs are cashing out their company-sponsored defined contribution plans when they leave, particularly younger participants and those in their prime savings years, which has become a big problem, according to a study by Fidelity Investments.
Fidelity examined 12.5 million DC plan participants to see who was cashing out their plans and the impact it has on their future retirement income.
Fidelity found that one out of three job changers cashed out some or all of their workplace savings potentially causing a long-term impact to their retirement security.
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Younger workers, those who earn less and those with small account balances are cashing out at the highest rates, a trend that has remained consistent over the past five years. The percentage of participants between the ages of 20 and 29 who cashed out some or all of their plan assets is 44 percent. Cash-out rates for those in their 30s and 40s are at 38 percent and 33 percent, respectively.
This is a concern given that these individuals are in their prime saving and earning years, Fidelity found. The average cash-out balance for these participants was $14,300. The older a participant is when withdrawing assets, the harder it may be to generate a sustainable income in retirement that could last 25 years or more.
A 30-year-old participant who cashes out a $16,000 balance today could lose up to $471 a month in retirement income cash flow, assuming she retires at 67 and lives to be 93, according to a hypothetical situation.
Participants who make between $20,000 and $30,000 a year and $30,000 and $40,000 a year have average cash-out rates of 50 percent and 43 percent, respectively. Cash-out rates are much lower, 13 percent, for those who make over $100,000 a year.
Fidelity encourages investors to keep their 401(k) savings working for them in a tax-advantaged retirement account when changing jobs. People who cash out when leaving a job have to start all over again at their next employer. If they change jobs several times through the course of their career, they continue to drain their retirement savings, making it extremely difficult to reach their retirement savings goals.
Instead of cashing out their previous 401(k) plans, participants should leave them in the plan or roll them over to their new employer's plan or an IRA. People who cash out their accounts will also be hit with large tax bills.
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