U.S. Workers Jeopardizing Retirement Security By Cashing Out 401(k) Savings, New Study Shows
But Hewitt Associates Study Also Reveals More Americans See
Wisdom Of Rolling Over Funds To IRA, Says RolloverSystems CEO
CHARLOTTE, N.C. (November 6, 2003) -- Every American who has retirement savings invested through a company 401(k) plan worries that their nest egg could be devastated by an Enron-like corporate accounting scandal or another stock market slump.
But Americans lose billions each year in self-inflicted losses by making poor choices in managing their 401(k) assets, especially when they are changing jobs, said Reginald Bowser, president and chief executive of RolloverSystems Inc., a provider of quick, easy and smart rollover solutions that enable 401(k) plan participants to protect and grow their retirement savings by rolling over their assets to an Individual Retirement Account (IRA).
According to a new study released Wednesday by Hewitt Associates (NYSE: HEW), a global human resources outsourcing and consulting firm, 42 percent of all employees who took 401(k) plan distributions in 2002 opted to take their savings in cash. That figure means that too many workers continue to put their future retirement security at risk, RolloverSystems said.
"Workers who take a cash distribution are losing up to 40 percent of their 401(k) savings off the top due to taxes and early withdrawal penalties," Bowser said.
"And they are losing out on potential capital appreciation of those assets that ultimately could cost them more than the short-term hit from taxes and penalties."
Previous studies have shown that job changers lose an estimated $7.1 to $8.3 billion in taxes and early withdrawal penalties annually by opting to take their 401(k) savings in a lump-sum cash distribution upon leaving their job.
RolloverSystems sees a silver lining in the new numbers, which are based on Hewitt's analysis of 160,000 employees who took 401(k) plan distributions last year. While the number of employees rolling over their savings to their new employer's 401(k) plan remained unchanged at 6 percent, the percentage of workers rolling over their savings to an IRA doubled to 52 percent from 26 percent.
"We think there are probably a variety of factors contributing to this increase, including the fact that incentives for rolling over to another 401(k) plan have diminished as employers have reduced or eliminated matching contributions outright," Bowser said. "In addition, more employees are certainly seeing that an IRA may offer a better variety of investment options and greater flexibility than many 401(k) plans can offer."
Contributing to the temptation to cash out and spend those hard-earned savings is the fact that completing a 401(k) rollover traditionally has been a difficult task that requires a lot of paperwork and typically takes up to six to eight weeks. A new rollover tool developed by RolloverSystems dramatically streamlines the process. Now, job changers can go online to www.rollovermarket.com, fill out a simple form, receive multiple IRA offers from a network of competing financial institutions, choose an IRA offer that makes sense for them, and complete the rollover process in 20-25 minutes. Merrill Lynch, J.P. Morgan Chase & Co., TD Waterhouse, and Harrisdirect currently offer Rollover IRAs through the RolloverSystems Network.
RolloverSystems' rollover tool is also available at www.CareerBuilder.com by clicking on the "Advice & Resources" tab and finding CareerBuilder's Rollover Center.
