Loans, Suspended Deferrals Can Reduce Nest Eggs by as Much as 20%
Dec 27, 2017
Loans, hardship withdrawals and suspended deferrals reduce American’s 401(k) savings by an average of 14%, according to research by MassMutual. The impact is greater for younger workers, as their time horizon for saving is longer than older people.
For example, a 29-year-old employee who is on target to retire at age 65 but who takes out a hardship withdrawal reduces their retirement readiness by 20%. By comparison, a 60-year-old who takes out the same withdrawal reduces their retirement readiness by 3%. MassMutual calculates the loss as lost interest earnings, taxes and penalties and the six-month suspension on salary deferrals that plan sponsors typically impose.
“MassMutual’s new analytic capabilities show there’s a real cost to employers as well as employees related to specific behaviors that reduce retirement savings and impair the ability of employees to retire sooner rather than later,” says Josh Mermelstein, head of retirement readiness solutions at MassMutual. “We are expanding our analytics capabilities to help employers and their financial advisers project these costs and take appropriate actions to keep retirement savings on target.”To help workers stay invested, MassMutual recommends that employers consider putting a limit on the number of loans participants can take out, offer a match to incentivize workers to contribute to their retirement plan, educate participants about the negative impact of loans, offer financial wellness programs that cover managing debt and building an emergency savings fund, and ensure that participants are educated about proper asset allocation.
Source: Plan Sponsor