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Top Reason for 401(k) Cashouts: Changing Jobs

Plan participants take money out of their 401(k)s prematurely for different reasons — such as plan loans and hardship withdrawals. But the biggest driver of leakage, according to the Employee Benefit Research Institute (EBRI), is cashing out when changing jobs. 

 

In fact, EBRI says that cashouts at termination of employment dwarf other reasons for leakage from 401(k) plans, accounting for two-thirds of total distributions. And that includes taking into account the effect of the six-month suspension of contributions that ordinarily accompanies a hardship withdrawal. 

When it conducted the research, EBRI assumed automatic enrollment and no change in participants’ and plan sponsors’ behavior if they had no access to plan balances. It considered the impact on employees with more than 30 years of eligibility by age 65 if cashouts at job change, hardship withdrawals and plan loan defaults were substantially reduced or eliminated. 

EBRI recently testified before the ERISA Advisory Council that such cashouts have a more significant impact on those in the lowest-income quartile, says EBRI: 20% of them would have insufficient savings to replace 80% of their income during retirement. They would have that effect on 10% of those in the highest-income quartile.