Cecily O'Connor
RedwoodAge.com

Boomers aren't as likely as their younger cohorts to raid retirement accounts, but they still succumb to the temptation.

According to a Hewitt Associates study of 170,000 401(k) participants who terminated employment last year, about one-third of employees in their 50s cashed out their 401(k) account in 2008, compared to 60 percent of workers in their 20s.

While warnings about the importance of leaving nest eggs alone have grown louder in recent years, the advice often falls on deaf ears among workers who are younger or have less tenure. Statistics show less than one in five workers will likely be able to meet their needs in retirement. But with unemployment and poverty rates on the rise, many Americans need the cash now to meet basic household expenses.

The high cash-out rate among young and middle-aged workers is "troublesome" because these employees are missing out on the opportunity for decades-worth of tax-deferred growth on their investments, said Pamela Hess, Hewitt's director of retirement research.

"Over the course of 20 or 30 years, modest amounts of savings can turn into surprisingly large sums of money," she said.

Sense of Balance
Account balance heavily influenced the cash-out rate among those in the sample. Almost half of workers with balances between $1,000 and $5,000 took a cash distribution. Meanwhile, percent of those with balances under $1,000 cashed out either voluntarily or due to force-out provisions.

Increased efforts to caution Americans about the negative financial consequences of cashing out have had little impact in changing their behavior over the past few years, Hewitt found. Consider that the number of workers who took a 401(k) cash distribution when they left their job - 46 percent - is virtually unchanged from 2005.

"Particularly during the economic downturn, employers and financial advisors have been increasingly vocal about the negative impact that cashing out of a 401(k) plan has on retirement savings," Hess said. "But employees don't seem to be getting the message."

Hewitt suggested policymakers and employers take several steps to help stop the cash-out trend.

This included limiting access to monies after termination, educating workers about the negative effects of taking a cash distribution, offering more institutional funds that allow workers to retain more assets over time, and simplifying the rollover process.