Dipping into retirement savings early and suspending contributions to 401k plans (or both) hits workers’ retirement savings to the tune of 14 percent, on average.
The result is delayed retirements and higher cost for employers in the form of salaries and benefits as their workforce ages.
For example, a typical 40-year-old worker who is currently on target to retire at age 65 but then borrows 30 percent of the savings in his 401k could potentially reduce his available retirement income by 15 percent and delay his retirement by five years, according to analysis from MassMutual.
So what’s to be done?
The company’s Viability Advisory Group announced new tools and analysis “to help employers and their financial advisors evaluate the potential costs and liabilities associated with the under-utilization of retirement savings plans, specifically if employees lack sufficient savings to replace 75 percent of their pre-retirement income at age 65.”
The impact of behaviors that negatively affect retirement readiness varies with age, the data shows, with younger employees most likely to participate in as well as suffer the most from such activities.
A 29-year-old employee who is on target to retire at age 65 but then takes a hardship withdrawal reduces his or her retirement-readiness by 20 percent on average. Meanwhile, a 60-year-old employee who is on target to retire and withdraws the same amount typically reduces his or her retirement readiness by 3 percent on average.
The loss of retirement readiness reflects the value of lost interest earnings on the withdrawal before retirement, taxes and penalties, as well as a six-month suspension in salary deferrals, which typically happens when retirement plan participants withdraw savings.
Projecting the cost of behaviors that can erode retirement savings and reduce retirement-readiness enables employers to better manage their retirement plans by:
- Deciding whether to allow or limit the ability of employees to take loans or withdrawals from their retirement savings;
- Ensuring retirement savings incentives such as matching contributions are used as intended, to help workers better prepare for retirement;
- Educating workers about the negative effects of loans, withdrawals and deferral suspensions on their ability to retire and encourage them to avoid such behaviors;
- Providing programs that educate workers about financial issues such as budgeting, debt management, retirement planning and related topics; and
- Educating employees about appropriate investment choices and asset allocations based on their retirement goals and time horizon to help employees more effectively accumulate and protect savings over the long term.