Cash-out rates have been rising because of economic stress facing retirement savers. "The population we really see cashing out at higher rates are younger and lower-income participants," says Jeanne Thompson, a Fidelity vice president. "They're paying off debt, especially student loans, or they want to buy a car or first home. It looks like a source of quick cash to them."
A second HelloWallet study last year identified debt pressures as a special worry among 401(k) savers. Debt loads increased 9 percent from 1992 to 2010. Among near-retirement households (age 50-65), debt soared 69 percent over that time period.
Weighing The Options
Problems with pension "leakage" have prompted some policymakers to call for tighter rules aimed at preventing early withdrawals. But some experts worry that might dampen contributions by workers worried about gaining access to their money in a tight spot.
Ramped-up education efforts by plan sponsors might help. Most employers send out termination kits to departing workers that lay out options, including leaving savings in the company plan or rolling over to a new employer's plan or an independent IRA. "Sponsors can elect to have one of our reps call to walk through the options, although not all of them do," says Thompson.
But the short-term nature of 401(k) accounts for some workers raises questions about how these savings are invested. Twenty-five percent of all 401(k) accounts are terminated after just three years, and 50 percent are gone after seven years, according to Federal Reserve data. Some have been rolled over, but many have been cashed out.
With such a short tenure, most assets in these accounts are accumulated through savings deferrals by workers and employer matches - not market returns. Yet the lion's share of young workers are auto-enrolled and invested by default in "target date" funds with a heavy weighting toward risky equities.
Does that point to the need to rethink how workplace plans are structured for some workers, who are less likely to stick with their investments for the long term - perhaps defaulting them into more conservative, guaranteed-return mutual funds?
"That's a very provocative point," says Fellowes.