Americans say bye to job and retirement fund
A new study has revealed a high number of Americans have been cashing out of their workplace 401K retirement funds upon job separation, with an alarming rate of “pre-retirement leakage”.
Research conducted by the UBC Sauder School of Business found 41.4 per cent of employees are redrawing from their retirement funds when they switch jobs, despite the US Internal Revenue Service (IRS) imposing a 10 per cent penalty on those younger than 59.5 years.
Nearly 90 per cent of those who cash out their retirement savings when switching jobs were found to have also taken all of it, presenting a relatively high rate of “pre-retirement leakage”.
“They take every penny out. Roughly two thirds take it all out at once, and the rest make multiple withdrawals,” UBC Sauder Associate Professor Yanwen Wang (who co-authored the study with Muxin Zhai of Texas State University and John G. Lynch, Jr. of the University of Colorado) said.
“But on average, within eight months, they take everything.”
The researchers said they understood people can face unexpected job losses and may require the funds for day-to-day expenses but this group accounted for only 27.3 per cent, leaving the “phenomenon” unexplained.
“Whatever benchmark you try to find, it cannot completely explain why such a significant number of people would touch their 401K at job separation,” Wang said.
The research also showed that the more employees matched the contributions, the more likely the employee was to cash in the 401K fund when they left. Wang said the reasons are likely a combination of “system design, economics and psychology”.
“For example, if the employer does a one-to-two match, where for every $1 you contribute your employer will match $2, it can change the psychological sense of ownership of those 401K accounts.
“So instead of your own saved money, it’s like a windfall. And then it feels more touchable, and more legitimate to spend it when you change jobs.
“Sixty percent of their accrued assets will leak out of the 401K system when people change jobs. If you consider how often people change jobs, on average every two to five years, it means they’re only left with the 401K balance of their last job. So people aren’t saving enough for retirement.
“If there is no assistance for quitting employees, there’s an unintended nudging for people to take the money out, especially if there is a large match.
“Something has to be done — not to control people’s 401Ks, but to provide enough knowledge so they’re aware of the consequences of their actions.”
It’s blindingly obvious why. Paying your mortgage off (in the face of rising interest rates) is a far better investment than mutual funds that have gone nowhere for the past 3 years.