Why Are So Many People Cashing Out Their 401(k) Plans?

Core Insights - A significant number of employees are opting to cash out their 401(k) plans when leaving a job, which is not considered a wise choice for retirement planning [4][6]. 401(k) Options When Leaving a Job - Employees have four basic options for handling their 401(k) upon leaving a job: 1. Keep it with the old employer, though if the balance is under $5,000, the employer may force a cash-out or transfer [5]. 2. Rollover to an Individual Retirement Account (IRA), allowing for a wider range of investment options and the ability to contribute periodically [5]. 3. Rollover to a new employer's plan, consolidating retirement savings in one place [5]. 4. Cash it out, which is the least favorable option for long-term retirement planning [5]. Harvard's Findings - A study by Harvard Business Review revealed that from 2014 to 2016, 41.4% of surveyed employees cashed out at least part of their 401(k) balance when leaving a job, with 85% of those individuals withdrawing their entire balance [6]. - The study suggests that cashing out is detrimental as it halts the growth of retirement funds in the market [6]. Reasons for Cashing Out - The high rate of cashing out is attributed to poor communication with departing employees, who often receive minimal guidance and may choose the simplest option of taking the money [7].