Pre-retirement ‘leakage’? Job switchers are cashing out their 401(k)s at alarming rate

Leakage is a term applied to 401(k) plans; namely, the money left behind in an old 401(k) savings plan when an employee starts a new job and enrolls in a new 401(k). (Photo: Shutterstock)

Employers frequently use matching contributions as an incentive to encourage employees to participate in defined contribution plans with the hope of improving retirement financial security, but while matching contributions are successful at increasing participation, they could also be having an unintended adverse impact on retirement security.

A study of about 15% of the U.S. workforce serviced by one of the nation’s largest recordkeepers revealed that matching contributions correspond with a higher rate of pre-retirement “leakage.” According to the study compiled by UBC Sauder Associate Professor Yanwen Wang, who co-authored the study with Muxin Zhai of Texas State University and John G. Lynch Jr. of the University of Colorado, this leakage happens frequently at job separation. Around 41% of employees who were voluntarily or involuntarily leaving their job cashed out their 401(k) savings, most of whom drained their entire accounts. This is despite a 10% penalty imposed by the U.S. government for withdrawing 401(k) funds before age 59.5, the study found.