Cashing Out Retirement Savings at Job Separation

The U.S. government imposes a 10% penalty to discourage preretirement leakage—cash withdrawal from 401(k) retirement savings before the age of 59.5 years. In our data set with 162,360 terminating employees covered by 28 retirement plans, 41.4% of employees leaked by cashing out 401(k) savings at job separation, most draining their entire accounts. We investigate the impact of employer matching contributions on leakage at job termination. The “composition” of funds in one’s 401(k) balance matters: leakage increases with employer contribution proportion. Micropatterns in our data align more with behavioral than with economic explanations of this effect. We estimate that a 50% increase in employer/employee match rate increases leakage probability by 6.3% at job termination. However, there could be a 35.3% reduction in leakage probability if employees ignore the perceived incentive generated by the account composition effect. Approximately 60% of accumulated assets from a 50% increase in match rate leak out of the system due to the account composition effect attributable to the percentage of assets contributed by the employer. Employers with more generous matches care about their employees’ well-being in retirement, but unintentionally nudge employees to cash out when they change jobs. We highlight proposals to help employers curb avoidable leakage.