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A recent survey conducted on behalf of Fidelity Investments found that many young professionals are cashing out their 401(k) plans when switching jobs to pay off debt, leaving them empty-handed when it comes to retirement savings.

“It is a major problem,” said Dean Schmitz, assistant director of Principal Connection, a division of Principal Financial Group Inc. that helps individuals better understand their plans and the importance of saving for retirement.

“They think: It is a small dollar amount, so let’s just take the cash; it’s just $5,000, how can that add up?”

The Fidelity survey was a culmination of multi-tiered ethnographic and quantitative research of about 1,200 members of Generations X and Y. For the purpose of the study, Generation X was defined as those born between 1967 and 1975, and Generation Y as those born between 1976 and 1987. Burke Inc. and CMI conducted the research on behalf of Fidelity between October 2007 and January 2008.

According to the Bureau of Labor Statistics, Gen X and Gen Y will account for more than 60 percent of the U.S. work force in just two years.

Of those surveyed, 40 percent said they cash out their workplace retirement plans when changing jobs, and it’s expected that they will change jobs approximately seven times during their careers.

“Cashing it in can be the worst thing to do,” said Doug Borkowski, clinic director at Iowa State University’s Financial Counseling Clinic. “There needs to be knowledge because why they’re doing it is because of a lack of knowledge and awareness.”

Schmitz echoed Borkowski and explained that a lot of younger professionals don’t understand the penalties and taxes they incur by cashing out their retirement plans.

“There is a cost of cashing out and just counseling them on the taxes and penalties involved, showing them that these small dollar amounts can add up, helps,” Schmitz said.

Schmitz also said that besides lacking knowledge about penalties, most young professionals aren’t aware of the options they have when switching jobs.

“The issue is when they separate from service,” he said.

He is often informing young professionals about the three options they have for maintaining their 401(k) plan when switching jobs: rolling it over to a plan at their new job, transferring it into an Individual Retirement Account, or keeping it with their former employer.

“We are trying to educate them up front on saving for retirement,” Schmitz said. “We want to plant the seed for what to do when you switch jobs.”

Principal offers educational classes and workshops about retirement plans for its client companies, such as Worksite Solutions, which Schmitz said, has a huge influence on peoples’ decisions to cash out retirement plans when switching jobs.

“Principal wants to make it easy for them to get them knowledge,” Schmitz said. “Some call in saying ‘I need my cash, I lost my job,’ maybe in a state of panic, but we talk to them about their different options, find out what their needs are, their employment outlook.”

However, Borkowski said the learning needs to start well before the workplace, beginning not in college, but in high school.

“We will tell them that you really want to think long and hard before you (cash out) because it sets you back,” Borkowski said. “When looking at the time value of money and the rewards of starting when you’re young, the answer is clear and simple.”

At the college level, Iowa State is one of the few universities in the nation that have a financial counseling clinic on campus, designed to help students manage and understand debt.

Also, Borkowski said, the government of the student body is currently drafting a proposal to present to the Iowa Board of Regents “saying we need to do more about personal financial literacy on campus.”

The university also has added more seats and class sections to its introduction to basic principles of personal and family finance class, which teaches students the basics of budgeting, record keeping, managing checking and savings accounts, consumer credit, insurance, investments and taxes.

Borkowski, who teaches the introductory finance class, said he puts a question on all of his exams that points out the benefits of starting a retirement fund early.

He also sends out a weekly financial tip via e-mail to the entire student body. Topics vary from week to week and generally pertain to the season or time of the year, he said.

But despite the weekly e-mails and workplace workshops, retirement planning is far down the priority list for these two generations.

Amid credit card debt, mortgage payments and student loans, both generations list other financial responsibilities as more important than saving for retirement. According to the Fidelity survey, more than half of Gen-X and Gen-Y ranked managing credit card debt and making house payments as a more critical goal than saving for retirement.

“If you just focus on paying off debt for five years, that’s five years you didn’t save for retirement, and five years you can never get back,” Schmitz said. “The negative savings is creating a big concern.”

Schmitz said that individuals must assess how much their debt is costing them and ask themselves how much they could potentially earn on their retirement assets before making a decision to cash out.

“Take a look at where the cost of the debt is,” he said. “Is it 22 percent interest, or a credit card that has 5 percent interest? Balance that out, do a little bit of both, but continue to save for retirement.”

Yet for the most part, Schmitz stresses to Generations X and Y to “start early” and when changing jobs, “do not cash it out. Those would be two key things and some people may say that is a small amount, it doesn’t matter – but it does add up.”

And with longer life spans, the importance of having large sums of money saved for retirement will become critical if Gen-Xers and Gen-Yers want to stay afloat in their later years.

Schmitz said that if these generations continue to cash out to pay off, “they will not have enough money for retirement – it is that simple. They are going to have to want to work longer, or drastically cut their spending in retirement if they are going to continue on that trend.”