In a recent post about the challenges in communicating employee benefits to employees, I included a Department of Labor stat: the average 34-year old has already worked for nine different companies in his or her brief career.

So I got to thinking: what are these employees doing with their 401(k) account balances when they leave? Based on what I see with our clients, most take the money and run. Two studies done last year support my anecdotal evidence.

The first study by the Congressional Research Service (CRS), Pension Issues: Lump Sum Distributions and Retirement Income Security, pointed out that most recipients of lump sum distributions were more than 20 years away from retirement.

The second done by Hewitt provided additional insight. Not surprisingly, Hewitt found a direct correlation between age and tenure and employees’ decisions to cash out of their 401(k)plans as well as the size of the account balance. The younger the employee the more frequent lump sum distributions were taken. But even a high percentage of older employees took lump sum distributions, i.e., more than 42% of employees age 40-49 took lump sums when leaving their jobs.

This decion despite favorable tax laws that promote portability of benefits by tax free rollovers or transfers to other tax favored retirement plans. The favorable distribution rules, by the way, were expanded by the new Pension Protection Act of 2006 (to be discussed at a later date):

  • Direct rollover to Roth IRA
  • Rollover by non-spouse beneficiary

Obviously there could be serious consequences to these employees not being able to accumulate  sufficient retirement savings.

One more example of why financial education needs to be available.

Here are the links (PDF) to both the Congressional Research Service report and the Hewit release on their study.