More than half of American employers offer employees access to a 401(k)s or other defined contribution plan, collectively spending more than $118 billion in match contributions a year. However, data from the Federal Reserve and the IRS analyzed by HelloWallet indicate that many plan participants are unable or unwilling to use their DC plans strictly for retirement savings — more than a quarter of households have withdrawn funds from their DC accounts for non-retirement spending, totally more than $70 billion in annual withdrawals.
A report last week authored by HelloWallet founder & CEO Matt Fellowes finds that the bulk of that $70 billion is from driven by cash-outs. Less than 8% of breachers say they have taken early distribution because they have been laid off and less than 6% cite what might be called “frivolous” reasons, like a vacation or large consumer item. The majority, 73%, cite everyday basic financial problems as why they have withdrawn from their DC plan.
Financially unhealthy, low-income and minority workers are the most likely to have taken early distribution from their plans, as well as those between the ages of 40 to 49.
Fellowes says the data indicate “a large and growing share of plan participants are receiving investment advice that” is misaligned with their short-term vs. long-term investment needs or drives up the cost of their savings with fees and penalties not helpful to short-term savings.
“For many of these households, they may be better off not participating in the 401(k) until they build sufficient emergency savings,” he says.
Penalized withdrawals increased from $30 billion in 2004 to nearly $50 billion in 2010, according to the report. “Sponsors should consider,” it reads, “requiring their investment advisers and management services to more effectively distinguish participants that are likely to actually use their DC plans for retirement.”
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