In a world full of financial advice and expert opinions, the temptation to cash out a 401(k) when changing jobs can be strong. However, this seemingly quick fix can have detrimental effects on your financial well-being both in the present and the future. A recent report by the Sauder School of Business at the University of British Columbia revealed that a staggering 41.4% of employees chose to cash out their 401(k) savings prematurely when leaving a job, with a whopping 90% emptying their entire balance.
While the immediate 10% tax penalty is an obvious setback, the long-term consequences can be far more devastating. Recognizing the importance of safeguarding your hard-earned savings, education and informed decision-making are crucial. One potential solution gaining traction is the adoption of auto portability, a mechanism that seamlessly transfers and consolidates 401(k) savings into an active account within the new-employer plan. By making this the default choice, cashing out becomes a less appealing option.
As an employer or policymaker, the responsibility to protect your employees’ retirement savings should be paramount, whether they’re new additions or transitioning to new roles. Here are some steps you can take to ensure a brighter financial future for your team members:
1. Educate and Inform: Provide comprehensive information about the implications of cashing out a 401(k) to your employees. Make sure they understand the potential tax penalties, loss of compound interest, and the impact on their retirement nest egg.
2. Promote Auto Portability: Consider adopting auto portability as a default option for employees switching jobs. By streamlining the process of transferring their savings to a new-employer plan, you reduce the allure of cashing out and empower them to make a financially sound decision.
3. Offer Financial Wellness Programs: Provide access to financial wellness resources and workshops that equip employees with the knowledge and tools they need to make informed financial decisions, including the importance of preserving their retirement savings.
4. Personalized Retirement Planning: Encourage employees to seek personalized retirement planning advice. Connecting them with financial advisers can help them understand their options and make choices aligned with their long-term goals.
5. Prioritize Long-Term Benefits: Remind your employees that their 401(k) is a crucial component of their financial security in retirement. Encourage them to consider the long-term benefits of preserving their savings instead of succumbing to short-term financial pressures.
In a world where financial decisions can have far-reaching consequences, empowering employees with the right information and tools is essential. By taking proactive steps to discourage cashing out and promoting responsible financial choices, employers can play a pivotal role in securing the retirement futures of their valued team members.
Schedule time on our CEO Mark Herschlag’s calendar to discuss insurance, employee benefits, compliance, and more HERE!
