401k leakage threatens the Retirement system

As more and more individuals begin to withdraw from their retirement accounts early, many warn of the catastrophic impact that early withdrawals have on the overall worth of U.S. retirement portfolios nationwide, citing a potential 25% drop in asset value according to economists at Boston College’s Center for Retirement Research. Employers of all types, from financial firms to industrial corporations are all threatened by this leakage on part of their employees sipping from pre-existing 401(k) plans. Thus, institutions have begun taking measures to better inform workers of the financial implication associated with borrowing from their retirement accounts early and threatening the financial integrity of the system

According to Lori Lucas, of investment consulting firm Callan Associates Inc,“Employers have done a lot to encourage people to save in 401k) plans, such as automatically enrolling them. But there is a growing recognition that if the money isn’t staying in the system, the objective of helping employees reach their retirement goals isn’t being met.” As a result, many financiers see the system as being decrepit and prone to failure, similar to that of the social security, whereby increased payout to retirees have taxed the system with far too limited workers to contribute to the money pool.

In spite of this, Movement Mortgage LLC, a Fort Mill, S.C.based mortgage lender, began requiring its employees to enroll in a 401(k) loan in an attempt to ensure that retirement funds will receive funding to retain asset value, as well as secure a game plan for future financial success. However, since the recession employees have grown accustomed to borrowing from their 401(k)s in a time of crisis, and might be tempted to take now on account of rising market sentiment and uneasy volatility following international moves by the Trump administration. As Rob Austin, director of retirement research at Aon Hewitt stated,“People are getting statements telling them they have $5,000 in this account and they are asking themselves, ‘How can I get my hands on this money?’”

Another major company tackling the 401(k) bubble is Home Depot, who in recent years launched several initiatives aimed at shifting the traditional dynamic that existed between people and their 401(k), in an attempt to extend the longevity of the program. As such, the home-improvement chain has recently instituted windows of time from their employees are allowed to withdraw from their account, thereby forcing employees to reconsider impulsive decision to withdraw from their account by making them wait at least 90 days after receiving payment before initiating another order to retrieve. In doing so, workers are less likely to borrow from their retirement portfolio early and jeopardize their retirement accounts.

Since instituting this program, the total number of outstanding loans at Home Depot has declined by 17%. As Mr. Buben noted, “Most people don’t realize the impact of taking a loan,” thus they become susceptible to financial shakes up and are more prone to withdrawing from their retirement account to satisfy current short term debts that they may have accrued to reckless money management habits.

In response to such positive feedback, some companies have begun instituting more rigorous policy measures, from encouraging employees to roll over existing retirement savings from their previous employer plans to their current employers and even restricting employees from borrowing money completely in order to build up reserve funding for retirees who qualify. Though this may appear practical in a complete logical sense, the act of compelling employees to act in a specified channel may prove detrimental to the effectiveness of the system, thereby forcing employees to opt out of the program entirely rather than accept the restrictive terms.  

However, in spite of measures by employees it appears that on average, about 30% to 40% of people leaving jobs tend to liquidate the cash from their accounts and pay penalties rather than leave their money or transfer it to another tax-advantaged retirement plan. In addition, according to the Investment Company institute, about 20% of 401(k) participants take 401(k), with roughly 10% defaulting on about $5 billion a year. As  Jake Spiegel, senior research analyst at Morningstar Inc stated, “401(k) plan leakage amounts to a worryingly large sum of money that threatens to undermine retirement security.” Therefore, it is imperative for both business and even congressional members to concocted a solution to stem the bleeding that poses a risk to the national retirement system.

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