Business consultant Hewitt Associates Inc. looked at the behavior of 170,000 participants in 401(k) plans who left jobs last year. The review shows that 46 percent of those changing or losing their jobs cashed out their accounts. A quarter of the workers rolled over their money to individual retirement accounts or other retirement plans, and about a third kept the money in their previous employers' 401(k) plans.
The fact that people are cashing out at such high rates does not bode well for future retirees, said Pamela Hess, Hewitt's director of retirement research.
"Millions of Americans who rely on defined-contribution plans will find themselves unable to achieve a financially secure retirement," she said.
The trend is even worse among workers in their 20s. The problem with those workers' taking out their money is that they miss out on decades of tax-deferred growth and the benefit of compound interest on their investment.
An employee who cashes out a $5,000 retirement balance at age 25 would get a check for just $3,500 after taxes and penalties. Left in an account, that $5,000 may have grown over decades to $75,000 at retirement, Hewitt said.
Jeremy Caverly, 29, of Silver Spring, Md., learned the hard way that cashing out does not pay.
He took out his 401(k) money when he was in his early 20s.
After receiving a job offer, he gave his employer four weeks' notice. However, two weeks later the offer was rescinded and he was left without a job. He saw the thousands of dollars in his 401(k) as a way to get him by until he found work again.
He ended up with about $10,000 from the account. Some of it he spent on a planned trip with friends, and some was used for expenses until he found a job, and some was put in a savings account.
