Last week, the Internal Revenue Service announced that
people younger than 50 in 401(k) and similar workplace retirement plans will be
able to deposit up to $18,000 in 2015, an increase of $500 from this year. Those
50 and older can toss in as much as $24,000, a $1,000 increase. But one of the
biggest problems with these accounts has nothing to do with how much we can put
in. Instead, it’s the amount that so many people take out long before they
retire.
Over one-quarter of households that use one of these plans
take out money for purposes other than retirement expenses at some point. In
2010, 9.3 percent of households that save in this way paid a penalty to take
money out. They pulled out $60 billion in the process, a significant chunk of
the $294 billion in employee contributions and employer matches that went into
the accounts.
These staggering numbers come from an examination of federal
and other data by Matt Fellowes, a former Georgetown public policy professor
who runs a software company called HelloWallet, which aims to help employers
help their workers manage their money better.
In a paper he wrote with a colleague, he noted that industry
veterans tend to refer to these retirement withdrawals as “leakage.” But as the
two of them wrote, it’s really more like a breach. And while that term has
grown more loaded since their treatise appeared last year and people’s debit card
information started showing up on hacker websites, it’s still appropriate.
Millions of people are clearly not using 401(k) plans as retirement accounts at
all, and it’s a threat to their financial health.
Early on in the history of these accounts, there was concern
that if there wasn’t some way for people to get the money out, they wouldn’t
deposit any in the first place. Now, account holders may be able to take what
are known as hardship withdrawals if they’re in financial trouble.
The big question is why, and the answer is that leading plan
administrators like Fidelity and Vanguard don’t know for sure. They don’t do
formal polls when people withdraw the money. In fact, it was obvious talking to
people in the industry and reading the complaints from academics in the field
that the lack of good data on these breaches is a real problem.
Another big reason for people pulling the money: Their
former employer makes them. The employers have the right to kick out former
employees with small 401(k) balances, given the hassle of tracking small
balances and the whereabouts of the people who leave them behind.
Account holder ignorance may also contribute to the decision
to withdraw money. In fact, young adults who spend their balance today will
lose part of it to taxes and penalties and would have seen that balance
increase many times over.
Given that so many people are pulling money from retirement
savings accounts for nonretirement purposes, perhaps employers should make
people put away money in an emergency savings account before letting them save
in a retirement account. It’s a paternalistic solution, but some of the large
employers he works with are considering it.
It’s surprising that regulators have not taken more notice
of the breaches here. The numbers aren’t improving, but more and more people
are relying on accounts like this as their primary source of retirement
savings.
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