First the bad news: 57% of 401(k) participants took their plan assets in cash when they changed jobs in 1998.
Now the good news: That's down from 64% in 1993.
There are two ways to cut down cashouts even further - a short-term one, and a harder long-term one. The harder one seems to be more effective.
In the short term, employers can boost efforts to make employees aware of the cost of cashing out. Many employees seem to believe they will give up only 20% in taxes when they cash out, and to some that seems a reasonable price to pay off some pressing bills, or to satisfy some desire, especially as they see the 401(k) plan as part of their savings.
But in fact, that 20% is just a down payment on what could be an ultimate tax bill of 40% of the balance or more.
Employers and 401(k) plan vendors must make more of an effort to get this message across to employees. They could be giving Uncle Sam 40% or more of their accumulated 401(k) savings.
Vendors could even make this point in some of their general advertising messages about their mutual funds and 401(k) services. It would be an important public service.
The longer, harder solution is to help employees build larger balances more quickly because the bigger the balance, the less likely the employee will cash out rather than roll over the assets.
There are no easy or inexpensive ways of doing this. Employers have to contribute more through their match, or encourage employees to contribute more. And, since many lower-paid employees find it difficult to contribute even a minimal amount, most of the burden must fall on the employer.
That should not be beyond the financial resources of most employers of significant size.
