Cash-Outs Require Communication

According to analysis of more than 12 million defined contribution plan participants, Fidelity Investments found that many participants changing jobs are receiving their retirement savings well in advance of when they should.

Younger, lower-paid participants cash out their savings at high rates, a trend that has been consistent over the last five years. About 44% of those between the ages of 20 and 29 cashed out some or all of their account balances. The rate for those in their 30s was almost 40%, and it was 33% for participants in their 40s.

Half of participants earning $20,000 to $30,000 cashed out, as did 43% of those in the $30,000 to $40,000 earnings range.

As a result, Fidelity recommends extra effort on the part of plan sponsors to urge employees changing employment to keep their retirement savings in the plan. Sponsors should point out that a cash-out significantly reduces savings and the likelihood of income replacement in retirement. They should also emphasize the potential income tax consequences. Focusing on the loss of potential savings growth and earnings when participants take money out of their account would also be helpful.

Fidelity’s report, “Cashing Out Can Derail Retirement,” is at 

http://tinyurl.com/FidelityCashouts.

For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

Kmotion, Inc., P.O. Box 1456, Tualatin, OR 97062; 877-306-5055; www.kmotion.com

© 2014 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.