Cashing out small 401(k) plans because of a job change costs $100 billion in retirement savings over a 30 year period, according to the Retirement Clearinghouse, a consulting and information source on retirement savings.
Spencer Williams, president and CEO of the Retirement Clearinghouse, is encouraging job-changers to roll over their 401(k) balances into a retirement plan with a new employer or rolling it over to an IRA rather than withdrawing the money.
Williams was a speaker at a recent Employee Benefit Research Institute policy forum session on the loss of retirement money in employer-sponsored plans. The cause of this loss is usually attributed to the plan participants taking loans or hardship withdrawals from the accounts. But two-thirds of the loss is from account holders cashing in smaller policies when they change jobs, Williams says.
Some 12.5 million Americans with defined contribution plans, such as 401(k)s, change jobs every year and face the decision of what to do with their retirement savings, says Williams. The people changing jobs with 401(k) plans of $5,000 or less amount to $8.8 billion in retirement savings.
Of those who cash out their policies, 63 percent do it because it is the easiest way to handle the process despite the taxes and penalties that are triggered, while 37 percent do so because they need the money, Williams says.
He advocates educational efforts to encourage employees to roll over retirement savings when they leave a job. Employers and recordkeepers can help facilitate the rollover if the employee asks for it, he says.