Close to half of workers who participate in 401(k) plans cash out their accounts when they leave their employer, a new study by Hewitt Associates finds.

Hewitt found that 45% of those who left their job last year elected to take a cash distribution rather than roll it over or keep it in the plan. The study covered 200,000 401(k) participants in 81 plans.

“Too many workers are not looking at their 401(k) savings as long term in nature,” says Lori Lucas, director of participant research at Hewitt, a benefits consulting firm in Lincolnshire, Ill.

One concern is that fewer workers than ever stay with a single employer until retirement, she adds.

The study did find 32% of departing workers kept their savings in their current 401(k) plan, and 23% rolled the money over to a qualified IRA or other retirement plan.

For the remaining 45%, however, the danger is that some may become “serial consumers” of their 401(k) savings, cashing in their accounts each time they leave a job, taking a tax hit and setting aside little or no money toward retirement, Lucas says.

Among those who either cashed out or rolled over, 66% opted to cash out, the study found.

Among departing employees aged 20 to 29, 66% cashed out, while more than 42% of workers aged 40 to 49 did so.

“It’s disconcerting to see that a number of middle-aged workers still elected to cash out of their 401(k) plans when changing jobs,” says Lucas. “It shows that many workers who are closer to retirement can be tempted to consume rather than save when they get the chance.”

The size of an employee’s account balance was also a factor in the likelihood of a worker cashing out his 401(k). About 73% of workers with plan balances under $10,000 took a cash distribution, compared to 31% of those whose balances were between $10,000 and $20,000 at termination.

About 65% of those who had been with their companies less than two years took the distribution without rolling it over, while among those who left after two to five years, 52% took a cash distribution. In contrast, around 21% of workers who had been with their companies 20+ years took a cash distribution when they left.

Thanks to a recent change in federal rules governing force-out provisions for 401(k) plans, fewer workers with low balances may opt to cash out in the future, Hewitt points out. Its study found that 87% of plans have provisions forcing terminating employees with small accounts to either roll over the balances into another qualified plan or to take their balances as cash.

Among plans that had such a provision in 2004, 65% forced out accounts under $5,000, while the remainder imposed a minimum account size of $1,000.

Under a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 that took effect in March, employers may no longer force departing employees to cash out or roll over their accounts if their balance is over $1,000. They can, however, require automatic rollover into another tax-qualified plan if the balance is between $1,000 and $5,000, unless the departing employee specifically asks for a cash distribution.

That provision is likely to result in fewer participants taking a cash distribution upon termination, Hewitt says.

Dean Schmitz, a sales officer with the Principal Financial Group, Des Moines, which runs 401(k) plans for a large number of employers, finds similar results to Hewitt’s. But while about half of departing employees cash out, only about 12% of 401(k) assets is lost to cashouts, says Schmitz, because a lot of those cashouts are small accounts.

“If you take the accounts of under $5,000 out of the equation, about 22% of participants cash out,” he explains.

The key to keeping participants from cashing out is to send each one a letter when they leave encouraging them to call an 800 number to discuss their account, Schmitz says. About 60% of those leaving do call Principal, where an advisor explains how even a small amount can add up to significant gains upon retirement and explains their options.

Making it as easy as possible to roll over the money is important, Schmitz says. Principal sends the required paperwork, completely filled in except for the individual’s signature.

One option the company offers is its Safe Harbor IRA, which is a simple savings account offered as the default option for departing workers who make no specific choice about their 401(k) account.

“It’s a way for us to cost effectively deal with accounts under $5,000,” says Schmitz.

Gary Chard, a Principal agent in New York, says he urges younger workers to set up an account where they can readily accumulate 401(k) funds from all the employers they work for over a lifetime. The Principal markets this type of account as the Consolidation IRA.

“I show them how those small amounts eventually can add up,” Chard says.