NerdWallet: The strange way generous 401(k) employer matches could be hurting retirement savings

by | Nov 15, 2023 | Stock Market

This article is reprinted by permission from NerdWallet. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. Many companies try to help their workers to save for retirement. Employers often offer 401(k)s, company matches and automatic enrollment to encourage saving.

Much of that effort goes to waste, though, when employees leave. A study published last year in Marketing Science, a peer-reviewed research journal, found more than 40% of departing workers cashed out at least part of their 401(k)s, and most of those drained every dime. What’s more, employers may bear at least some of the blame, according to researchers Yanwen Wang of the University of British Columbia, Muxin Zhai of Texas State University and John Lynch Jr. of the University of Colorado. The study, titled “Cashing Out Retirement Savings at Job Separation,” suggests generous company matches can make cashing out more tempting. Plus: The saga of company stock in 401(k) plans — some problems solve themselvesCash-outs drain future retirement security The researchers examined records of 162,360 employees who left jobs at 28 employers between 2014 and 2016. Of the 41.4% who cashed out retirement savings, about 64% took all the money out in one transaction, while 21% emptied their accounts with two or more withdrawals. The people who took money out had smaller balances — $15,271 on average — compared with those who left their accounts in the employer plan ($69,546) or who rolled their savings into an IRA or a new employer plan ($67,353). The damage from any 401(k) withdrawal is significant, however. Cash-outs trigger taxes and penalties that often equal 30% or more of the withdrawal, plus the l …

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