Breaches Undermine Retirement Security

Almost one third of American households participate in a 401(k) or 403(b) retirement saving plans – but a large portion of their money never makes it to retirement. More and more workers seem to be tapping into their retirement accounts for non-retirement needs.

New data shows more than one in four of workers with retirement plans are using them to pay current expenses.  These withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year. With all the federal policymakers eyeing cuts to Social Security and Medicare, the drain from these accounts have huge implications for future retirees. Essentially, we are going from bad to worse. There are already very few workers who have access to stable pension plans and savings in retirement accounts continue to leak out at a high rate. More than one in four workers dip into their retirement fund to pay their mortgages, credit card debt or other bills.

Since 2008 there has been a 12 percent increase in the number of workers who have taken loans against their retirement accounts or withdrew money outright. Because those who withdraw money face hefty penalties, the most common way Americans have tapped into their retirement funds is through loans.

In 1980, four out of five workers were covered by a traditional pension plan that paid them a fixed benefit once they retired. Now, just one in five workers have such a pension, leaving 401(k) and 403(b) retirement plans as the primary vehicles for retirees to supplement their Social Security benefits. Therefore, enabling people to spend down retirement money prior to retirement for anything other than the most severe circumstances is a terrible mistake.

However, millions of Americans have been caught between flat wages and high expenses. They feel they have no choice other than to withdraw or borrow from their retirement accounts. In 2010, twenty-eight (28) percent of participants reported they had an outstanding loan against their retirement accounts and nearly 7 percent of employees took hardship withdrawals that year while another 42 percent of workers cashed out their plans rather than rolling them over when they changed jobs. A recent study by Boston College found the typical household approaching retirement age has an average of $120,000 in their retirement plan, enough for roughly $8,000 a year in retirement income.

Federal policy makers and employer retirement managers have focused little on the threat to retirement security posed by premature withdrawals from savings plans and instead have worked to devise ways to get workers to put more money into their accounts at an earlier age, including the newly introduced “MyRA Accounts.” Annual contribution limits have increased over the last few years but everyone forgets success depends on the workers consistently contributing to them and allowing the money to stay in place throughout their careers, allowing their investment returns to compound.

In summary, retirement saving is important and workers should be contributing to their retirement accounts on a regular basis. When you are considering borrowing or tapping into your retirement accounts for current needs, you should really weight your options and the cost before making such a big decision.

About benefitsboard

Art Rhodes is the President and CEO of the Church of God Benefits Board, Inc. - the administrator of the Ministers' Retirement Plan and the Church Loan Fund, Inc. The corporate offices of the Benefits Board are in Cleveland, TN.
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