Financial advisors assail the ‘spend now, pay later’ habits of workers who take cash rather than roll over 401(k) money when they change jobs, according to interviews.
Choosing to spend money meant for retirement can have a devastating impact on a worker’s income planning for retirement, they caution.
Their remarks came in response to a finding that 45% of those leaving their jobs elected a cash distribution rather than a rollover. The finding appears in a survey, conducted by Hewitt, Lincolnshire, Ill., and released in July 2005, that polled nearly 200,000 workers who participate in their 401(k) plans.
Mary Schapiro, vice chair of the National Association of Securities Dealers, Washington, noted the finding in a March 20, 2006 speech before a Securities Industry Association conference. In the speech, Schapiro said, “This is a trend that we are worried will increase as people begin to exhaust their home equity lines of credit.”
Currently, the majority of cash-outs are done by younger workers who do not have a lot of money in their 401(k)s, according to the Hewitt survey. Sixty-six percent of cash distributions, Hewitt found, are in the 20-29 age group.
Also, 72.5% of workers with 401(k) balances under $10,000 took cash distributions, Hewitt says. The number of workers taking distributions drops to 31% when the 401(k) plan balance was between $10,000 and $20,000 at termination, Hewitt says.
Planners say that even if the balance is small, the impact is large.
Workers in their 30s don’t think the balance in their accounts is a lot of money, but even if it is $10,000, with compounding, it adds up, says Jeffrey Golden, a certified financial planner with Circle Advisers, New York. If a worker in his or her 30s works through 65, and earns 7% annually, money would double approximately every 10 years, he says. So, in the time between the job change and retirement, that worker would have forfeited approximately $80,000, he estimates.
“The intention for the money is to squirrel it away for retirement. Why would changing jobs change that intention?” Golden asks.