$92 billion’s cashed out of 401(k) plans each year when workers switch jobs

A new study found that workers increasingly are seeking personalization, simplification and portability in their retirement options, while looking for more professional help and guidance in their retirement planning.

The 2022 Retirement Trends Study from Icon Savings Plan focused on the shifting attitudes and preferences of workers toward their retirement benefits. Icon provides retirement savings plans for individuals and businesses. The digital survey of 1,650 actively contributing retirement plan participants and employed workers without access to a plan revealed changes in employees’ feelings toward retirement plan options since 2020, the last time Icon conducted the study. For instance, the survey found that 78% of respondents want access to emergency savings through their retirement plan, compared to just 53% in 2020. In addition, 80% prefer a discretionary cash bonus to a 401(k) match – vs. 55% of respondents two years ago.

The study examined how employees treat their retirement plans when they switch employers. Of those surveyed, 30% roll it over to an IRA and another 30% roll it to a retirement plan at their next job. In addition, however, 17% cash out the plan, and 14% leave the plan behind at their old employer.

Related: ‘Show me the income’: Employees seek guidance for their long-term retirement income

According to the survey, 83% of respondents want a workplace retirement plan that travels with them from job to job without a rollover or change in the plan, marking a 13-point increase from Icon’s 2020 study. In its report, Icon pointed to Employee Benefit Research Institute research indicating that $92 billion is cashed out of 401(k) plans each year because they are not “seamlessly portable.”

The study underlined how much individuals need employers and financial advisors to support them in their retirement planning and decision-making, particularly because of ongoing shortcomings among workers in financial literacy. Just 30% of respondents said that they trust themselves to make good financial decisions, and 63% agreed that “thinking about my financial situation stresses me out” – an increase of 10 percentage points since 2020 – including 72% of those aged 25 to 40. In addition, only 32% believe they understand the principles of investing.

“What becomes clear when looking at this report is that our current retirement savings system (defined contribution plans) has reached its limit,” says Laurie Rowley, CEO of Icon Savings, in the introduction to the report. “The system is buckling under the pressure to adapt to new realities and is failing to serve both businesses and workers. The current retirement savings system is failing millions of American workers and businesses.”

The survey shows that employees with workplace retirement plans recognize the importance of those plans, as 64% called their plan very valuable and another 32% called it somewhat valuable. Seventy percent of participants prefer a retirement plan offered through a financial service provider rather than a state-run plan.

Of those participating in the survey, 40% do not have access to a workplace retirement plan. Fifty-three percent of the uncovered workers are full-time, W2 employees, and 30% are independent contractors. Of the uncovered workers, 68% have at least a partial college education.

There were sometimes stark differences in responses between uncovered and covered workers. For instance, uncovered workers are much less likely to have access to emergency savings (54%) than covered workers (79%), and 66% of uncovered workers say they feel financially confident compared to 81% of covered workers. Also, 66% of workers without a workplace retirement savings plan reported feeling stress about their finances vs. 61% of covered employees. Of those respondents without an employer retirement plan, 48% say they are using a savings account for retirement saving, 17% point to the stock market and 16% are investing in an IRA.