How to nudge departing employees toward maintaining their 401(k) savings.
estimated that 30% of American workers changed jobs in 2022 alone, most for higher pay. But doing so can be treacherous for your ability to retire when you want and with the lifestyle you want. Why? Because too many people cash out their entire 401s whey they leave a job — and employers do little to prevent it., the median 401 account for a 55- to 64-year-old was $89,716.
Shockingly, 41.4% of employees cashed out 401 savings on the way out the door. Equally surprising was that 85% of those who did cash out drained the entire balance. The 41.4% cash-out figure at job exit in our data also dwarfed the number cashing out during their years of employment. While employed, people had plenty of opportunities to have a cash crunch from circumstances like partner job loss, medical emergencies, weddings to plan, impending college bills, and they faced the same taxes and penalties for early withdrawal. Yet only 7% cashed out via hardship withdrawal and 3% via 401 loans that were not repaid on time.
Most employees with balances less than $1,000 are automatically issued a check of their savings minus income tax and 10% penalties, with no other options offered. Critically, these form letters make the option to cash out far more front-of-mind than it was during years of employment. They turn psychologically illiquid retirement savings into a source of ready cash. When exiting employees are nudged to consider the option to cash out, it becomes quite appealing to spend what had previously been seen as an untouchable source of retirement security. No wonder so many more cash out when changing jobs than when working.
Employers could also contract with their financial services partners to provide Web-enabled “just-in-time financial education” around preserving retirement balances during a job change, or pay for a session with a financial advisor.
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