A new study examines the trends and consequences of cashing out retirement savings when American workers change jobs. The paper, “Cashing Out Retirement Savings at Job Separation,” co-authored by Yanwen Wang of the University of British Columbia’s Sauder School of Business, offers technical analysis and is summarized in a more accessible piece in the Harvard Business Review, “Too many employees cash out their 401(k)s when leaving a job” (March 7, 2023).
401(k) plans, established in the U.S. in 1978, are employer-sponsored defined contribution retirement accounts similar in purpose to Canada’s registered retirement savings plans (RRSPs) and employer-sponsored DC pensions. These tax-deferred accounts can hold stocks, bonds, mutual funds, exchange-traded funds (ETFs) and related investments. However, the rules governing withdrawals on leaving a job differ significantly between the United States and Canada, so the study’s findings are primarily applicable to U.S. policy and behavior—though there are lessons for employers and workers in both countries.
On average, an American worker will hold about 12.4 jobs across their career, which led the study’s authors to emphasize that “employers should recognize that most people working for them will change jobs before retirement.” Despite that mobility, many departing workers opt to cash out their 401(k) balances rather than roll them over and preserve tax-deferred growth.
Alarming rate of cash-outs in the U.S.
A UBC blog highlighted the study with the headline, “Americans are cashing out their retirement savings at an alarming rate.” The research found that when employees switch jobs, 41.4% cash out their 401(k) balances—even though the U.S. Internal Revenue Service generally imposes a 10% penalty on withdrawals taken before age 59½.
The researchers—Yanwen Wang, Muxin Zhai and John Lynch Jr.—analyzed records for 162,360 employees who left 28 U.S. companies between 2014 and 2016. The dataset included age, gender, hire date, income and contribution behavior. One stark finding: of the employees who cashed out, 85% withdrew their entire 401(k) balance.
Wang cautions that Canadian retirement rules differ enough that the study cannot be directly applied to RRSPs. Still, she notes a key policy distinction: many Canadian plans include lock-in features that restrict withdrawals after job changes, reducing the likelihood of draining retirement assets.
Many Canadian RRSPs have a lock-in feature
Wang explains that many Canadian RRSPs and pension arrangements include an illiquidity or lock-in element, meaning cash withdrawals after a job change are either heavily restricted or prohibited unless the person becomes a non-resident for tax purposes. That illiquidity likely curbs what researchers call 401(k) “leakage” in the U.S. She suggests policymakers could consider a similar locked-in option alongside an emergency savings plan to balance long-term retirement security with short-term liquidity needs.
The Harvard Business Review article also cites a Pew Research survey showing that 30% of American workers changed jobs in 2022, often for higher pay. When employers present departing workers with the choice to cash out, that immediate access can be very tempting. Unlike most other developed countries, Americans can generally tap defined contribution retirement savings without meeting long unemployment or hardship criteria.
Beyond losing future tax-deferred growth, cashing out triggers income tax on the withdrawn amount and, for those under 59½, an additional 10% penalty. The study found that plan rules and administrative practices push many small-balance participants toward cashing out: employees with under $1,000 are often issued a check automatically (with tax and penalties withheld) and given no alternative, while those with balances between $1,000 and $5,000 are typically offered only rollovers into an IRA or a transfer to a new employer plan. Participants with balances above $5,000 can also leave funds in their former employer’s plan.
Employer matches viewed as “free money”
The way options are communicated matters. Exit notices and form letters often list cashing out as a simple, immediate choice, which can make it feel like accessible “free money,” especially when employers offer generous matching contributions. The study observes that higher employer match rates can perversely increase the temptation to treat retirement balances as windfalls—encouraging cash-outs rather than preserving retirement security. The authors summarize the behavioral dynamic succinctly: “Right now, cashing out is the path of least resistance. People choose what is easy, not what is wise.”
By contrast, Canadian research shows many households are not confident about retirement readiness. An H&R Block Canada survey from April 2023 reported that nearly half of Canadians feel unprepared for traditional retirement at age 65, and about 50% plan to continue working at least part-time during retirement. Among Canadians aged 18 to 54, more than a third believe they may never fully retire. The survey also found that 56% hold an RRSP and 54% have a tax-free savings account (TFSA), while 19% plan to rely on public pensions such as CPP, OAS or GIS.
Jonathan Chevreau is the Investing Editor at Large for MoneySense and founder of the Financial Independence Hub. He is the author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].
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