Fewer cash out 401(k)s

Though the number of workers who choose to cash out their 401(k) plans when changing jobs has dropped, more than half still take the money and run, according to a study by Hewitt Associates. "A lot of plan participants still view access to their money as a windfall, rather than keeping it tax deferred," says Mike McCarthy, a defined contribution consultant with Hewitt Associates LLC in Lincolnshire, Ill. Fifty-seven percent of 401(k) participants took the cash in 1998, down from 64% in 1993, the study found. What isn't known is whether the decrease in the number of people who took a cash distribution is due to increased education from plan sponsors, and how much is due to market growth. Market growth leads to a higher number of rollovers, since "People with more money are less likely to take the tax hit," Mr. McCarthy explains. Plan participants pay a tax penalty of about 40% of their 401(k) account balances when they take the cash distribution, rather than deferring the taxes by rolling over funds into another qualified plan, Mr. McCarthy says. The Hewitt survey analyzed more than 193,000 distributions from defined contribution plans in 1998. The study shows that the smaller the balance, the more likely the worker is to take cash, finding that 78% of those who took distributions had balances of less than $5,000. Still, a fair number of 401(k) plan participants with larger balances also grab the cash. Among those with balances from $25,001 to $50,000, 31% took the cash; and 17% of participants with balances between $50,001 and $100,000 did the same. " A lot of times people think about the 20% tax withholding rate. That rate is a down-payment on the ultimate tax," Mr. McCarthy says. Of those who rolled over their 401(k) balances, more directed it to an individual retirement account than to another qualified plan, the survey indicated. About 37% of 401(k) plan participants rolled over to an IRA, up six percentage points from 1993, while 6% rolled their 401(k) funds into another qualified plan, up one percentage point from five years ago, the survey revealed.