Fidelity analysis finds a ‘danger zone’ for employees cashing out 401(k)s

The “danger zone” for employees fully cashing out of their retirement savings plans is 30-39 years old, according to recent analysis based on more than 20 million Fidelity 401(k) participants.

Mike Shamrell, V.P. of Fidelity’s workplace investing thought leadership, presented these findings at a recent Employment Benefit Research Institute (EBRI) webinar on tenure trends of American workers and how these trends are affecting their retirement savings. The Fidelity study examined behaviors across 2022 on its 401(k) platform.

According to Shamrell, the overall average age of participants is 44.6 years, and the average tenure on Fidelity’s platform is 8.5 years. Among the participants on the 401(k) platform, 8.4 million are millennials, 3.9 million are boomers, 7.5 million are Gen Xers (down from 2021) and 1.5 million are Gen Zers, (up from 2021). The average tenure dropped from 9.7 years at year-end 2017.

In addition, the average full payout (or “cash out”) was just $11,000 in 2022, but there were almost 1.1million workers who took a full payout when they left their jobs.

The “danger zone”, Shamrell pointed out, appears to be among participants who were 30-39 years old. Apart from those who had less than 1 year of tenure, the highest number of full payouts (nearly 70,000) occurred in this age range for workers who had 5-10 years of tenure.

Full payouts spike for workers in this age group at just about every tenure level until you get to 15+ years, he added. This suggests that life events may be playing a role in cash out behavior, he explained. These groups may be juggling multiple financial goals, such as saving to buy a house, saving for retirement or for college, but they are also carrying unprecedented levels of debt.

Aside from age and tenure, full payouts are also concerning among traditionally underrepresented groups and workers with low balances, Shamrell added. While cashing out affects employees from all groups, women, Black and Latino employees, lower-income and young employees are affected the most.

Financial challenges driving full payouts

While education plays an important role in helping to curb cash outs, employers may also want to examine programs that address the financial challenges that drive this behavior, Shamrell said.

These include programs that encourage workers to save for short-term expenses in addition to retirement, as well as programs designed to streamline the retirement-savings process when participants change employers.

Also, employees who have access to short-term savings, such as an emergency fund when they need it, are more financially confident, have higher financial-wellness scores, and are more likely to be “on track” for retirement.

In addition, new automatic portability or “auto-portability” services automatically transfer an employee’s retirement account to their new employer’s plan (unless the participant elects otherwise for vested accounts with less than $7,000). This can reduce the costs and burden of terminated participants and can help participants preserve savings and achieve financial wellness.

How tenure trends affect retirement savings

During EBRI webinar, attendees also learned about tenure trends of American workers and how these trends are affecting their retirement savings.

Craig Copeland, director, wealth benefits research, EBRI, presented a brief overview of the benefits-tenure scenario. Among the highlights of Copeland’s presentation:

• Over the past 35 years, the median tenure of all wage and salary workers who are ages 25 or older in the U.S. has stayed at approximately five years.
• Since the pandemic, the share of workers with the lowest levels of tenure has grown, while the percentage of workers with the highest levels of tenure has held steady.
• These tenure results indicate that, historically, most workers have changed jobs during their working careers, and all evidence suggests that they will continue to do so in the future.

Implications of persistent job changing

This persistence of job changing over the working careers of employees has several important implications, according to Copeland. These include:

• Potentially reduced or no defined-benefit plan payments due to vesting schedules
• Reduced defined-contribution plan savings
• Lump-sum distributions that can occur at job change, which could all result in lower retirement incomes
• At the same time, the longest-tenured workers are in the position to best take advantage of employment-based retirement plans.

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at amseka@INNfeedback.com. 

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