MutualFundWire.com: Don't Cash in that Rollover
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Monday, September 13, 1999

Don't Cash in that Rollover


According to the consulting firm of Hewitt Associates of Lincolnshire, Illinois, a majority of participants who change jobs do not rollover their 401(k) plan assets into their new employer's plan. In fact, this trend is so severe that it should cause concern for defined contribution vendors of all sizes.

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  • Hewitt Associates
    • The Hewitt study reports the following figures:
    • 57% of participants who are involved in a rollover cash out;
    • another 37% took their distribution and placed it into an IRA
    • and only 6% moved their assets from one 401(k) plan to another.
    "This study was based on 193,000 distributions, so it was quite a large sample," a spokesperson with the firm told the 401kWire.com. These figures have not changed much since 1993, when a similar study was taken. Then, only 5% of participants rolled assets from one 401(k) plan to another.

    Hewitt is offering participants the standard advice that the $10,000 they take out today could create more wealth for them if it stayed invested over the long term. "It is very tempting for employees to take the cash now. Some people just see the money there and think of the short term and not the long term," the official continued.

    "There is a correlation between a low balance and cashing out. 78% of participants with assets below $5,000 take the cash rather than rolling over into a new plan," he reported.

    The consulting firm is offering vendors some advice on this subject as well. Here are some of their points:
    • Vendors should include material on rollovers in the communications they send to a client's new hires. The idea is to make participants aware as early as possible about the tax burdens involved in a rollover cashout.
    • Communicate a participant's options upfront. If the participant knows what possibilities are available, then that participant can avoid future mistakes.
    • Design participant education so it is inclusive -- i.e. that has something to offer everyone.
    • Always keep participants up-to-date on investment options in the plan.
    • Never let education stray into advice.
    The Hewitt material also included two hypothetical participants: one who cashs out of a plan, the other who keeps assets in the company 401(k). The point of the exercise is to demonstrate how assets can grow if they stay in the 401(k).


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