According to an analysis by Fidelity, the growth represents a 15.5% increase from a year earlier and nearly doubles the low reached in March 2009, when the average 401(k) balance was $46,200. For preretirees age 55 and older, the average balance is $165,200. While 78% of the year-over-year increase was due to positive stock market momentum, 22% of the growth came from employee and employer contributions. Fidelity cites this as demonstrating the importance of continued participation and contributions, regardless of market conditions.
Fidelity also examined the combined balance for investors who hold both a 401(k) account and an individual retirement account (IRA) with the firm. For such investors, the combined average balance between the two accounts is $261,400, an increase of 16% from $225,600 at the end of the fourth quarter 2012.
The analysis also reveals that more than one-third (35%) of participants cashed out their 401(k) balances when leaving their job in 2013. The trend is highest for younger participants, ages 20 to 39, with four in 10 participants in the age group (41%) cashing out when leaving a job last year. With the average cash out value at nearly $16,000, the analysis notes that many 401(k) investors are forfeiting years of potential investment growth and retirement cash flow.
“People with a 401(k) who change jobs have a critical decision to make: take the quick cash, or keep the balance in their existing plan or roll it over into another tax-advantaged account, two options that may provide them considerable income in retirement,” says James MacDonald, president of workplace investing at Fidelity, based in Boston.
“This decision isn’t easy,” MacDonald says. “Everyone’s personal financial situation is different and there are times when a person must have access to cash. However, we urge all investors—especially young savers with years of potential investment gains—to keep their 401(k) savings working for them in a tax-advantaged retirement account when changing jobs.”
The consequences of cashing out a 401(k) may be significant, notes MacDonald. For example, a hypothetical 30-year-old who cashes out $16,000 could lose $471 per month in retirement income cash flow by not leaving it invested in a retirement account (assuming that he or she retires at 67 and lives through age 93). People also pay applicable federal and state taxes plus a 10% penalty for early withdrawal. In this hypothetical example, a $16,000 cash out would result in about $3,200 in taxes and another $1,600 in penalties, leaving the participant with about $11,200.
The Fidelity analysis notes that there are alternatives to cashing out a 401(k) that provide investors investment flexibility. They include keeping the balance in a former employer’s plan; rolling the balance into a new employer’s plan, if eligible; or rolling into an IRA. In doing so, investors preserve their opportunity to build long-term positive outcomes by keeping their assets in a tax-advantaged retirement savings account, MacDonald says.
“Cashing out is tempting, especially in times of transition like changing jobs,” says MacDonald, stressing that it is important for employers to educate employees on both the cost of cashing out and the opportunity for growth by remaining invested.