It appears that you can lead a worker to a tax benefit but you can't make him think.

After more than a decade of preaching, education, rule tightening and everything else that the government, financial planners and benefits experts can think of, more than half of the people who change jobs still take the cash out of their 401(k) plans and spend it, a new survey has found.

What they should be doing is rolling it over into the new employer's plan or into an individual retirement account.

This is beyond shortsighted. This is moronic. With traditional pension plans rapidly becoming an endangered species and Social Security severely underfunded, personal savings are likely to be a major source of income when today's workers reach retirement.

Taking the cash means paying not only the taxes that were deferred when the money was placed into the account but also an additional 10 percent penalty.

Many people are "going to lose 40 to 50 percent of that money in taxes," said Mike McCarthy, a retirement-plan expert with Hewitt Associates, a big benefits consulting firm based in Lincolnshire, Ill.

Hewitt surveyed 193,000 distributions last year from 401(k) and other "defined contribution" plans. These are plans in which workers, companies or both contribute a set amount and at retirement the worker gets whatever those contributions plus investment earnings add up to. Typically they are funded with pretax dollars, and investment earnings accumulate tax-free until withdrawn at retirement.

The survey found that 57 percent of distributions were taken in cash. That's down a bit over the past five years, but "it is still quite alarming," McCarthy said.

Not unexpectedly, workers with smaller balances were more likely to take the cash than were those with big nest eggs. Seventy-eight percent of balances under $5,000 were paid in cash.

But even small balances can become significant over time.

A nest egg of only $5,000 turns into nearly $35,000 over 25 years if invested at 8 percent a year, and into more than $50,000 if the annual investment return is 10 percent.

"When you consider that an employee changes jobs an average of five times during his career, those five balances could add up to a significant amount over time," McCarthy said.

To illustrate this, Hewitt calculated what would happen over the working lives of two employees who have accumulated $10,000 in their 401(k) plans by age 25. They each change jobs four times, but one withdraws his balance and spends it after the first change, while the other rolls his over. Thereafter neither makes a withdrawal and both roll their balances over at subsequent job changes.

The accounts are assumed to earn 8 percent annually.

At age 60, the worker who withdrew $10,000 ends up with a nest egg of $212,031, while the worker who let his balance ride has $359,885.

The study found that many larger balances were also cashed out. Thirty-one percent of workers with balances between $25,000 and $50,000 took them in cash, and even among those between $50,000 and $100,000, 17 percent cashed out.

It's not certain what workers are doing with the money. One would hope that some are at least using it for long-term items such as the down payment for a house.

But McCarthy is not optimistic.

The evidence is mostly anecdotal, he said, but it suggests that most workers' approach "is not usually as strategic as 'I can take this money and buy a house.' " Instead, "people will spend it on a boat or a car" or use it to pay off credit card bills, he said.

The cashing out continues despite government and employer efforts to discourage it. The Labor Department and other agencies during the Bush administration recognized the trend, and since 1992 employers have been required to withhold for taxes 20 percent of balances that are not rolled over into an IRA or another employer's plan.

The thought was that the tax bite would bring home to workers just how much they would lose.

Experts have hesitated to press for even tougher regulations, though, for fear of discouraging employee participation, or of making the plans so complicated that employers drop them.

Instead, most experts are urging employers to step up their education and communication efforts with employees.

McCarthy noted that the average balance being rolled over into an IRA has grown much more over the past five years than either the average balance being cashed out or the average balance being transferred to a new employer's plan.

"Maybe employers can take some lessons from IRA providers," who have proved very adept at marketing the benefit of long-term tax-deferred saving, he said.

For employees, he and others say, the key is to remember that uninterrupted tax-deferred investing is the surest way to build retirement savings.

When changing jobs, talk to people at the new employer about the new company's plan: Does it have one? What are the investment choices? Can you roll your previous balance into it? Or you may be able to leave the balance in the old plan.

Remaining in a 401(k) has some advantages over an IRA. Most companies allow loans from their plans, while they are forbidden from IRAs, and companies often negotiate very low investment-management fees for their plans, better than you may be able to do with an IRA.

But if nothing else suits, roll it into an IRA. And remember to have the balance transferred directly so you don't have to deal with the withholding. If the 20 percent is withheld, you have to make it up out of your own pocket and then get it back as a tax refund later on. That's an expense and complication you don't need.

Cashing Out

When changing jobs, many 401(k) plan participants opt to take cash payments rather than rolling over the balance for retirement. The smaller the balance, the more likely the employee is to take the cash payment:

Percentage of 401(k) distributions taken by individuals in cash, by balance amount

Less than

$5,000 78%

$5,001-$10,000 57%

$10,001-$25,000 46%

$25,001-$50,000 31%

$50,001-$100,000 17%

$100,001 plus 6%

Overall, however, employees were somewhat less likely to take the cash last year than were employees five years before:

401(k) distributions:

Where's the money going? 1993 1998

Payments made directly to an individual 64% 57%

Payments rolled to a qualified plan 5% 6%

Payments roAlled to an IRA 31% 37%

SOURCE: Hewitt Associates