Posted on 08/21/2010 5:22:10 PM PDT by 2ndDivisionVet
As the economy continues to worsen under Obama's "recovery" plan, more disturbing news emerges. A record number of workers made hardship withdrawals from their 401(k) retirement plans. In fact, "the number of workers borrowing from their accounts reached a 10-year high" and reflects "the financial stress many workers" are experiencing according to Beth McHugh, Fidelity's vice president of marketing insight.
The report was made by Fidelity Investments which administers 17,000 plans and represents 11 million participants. The number of people initiating the hardship distributions has risen from 45,000 in 2009 to 62,000 in 2010. Equally alarming is that "45 percent of participants who took a hardship withdrawal a year ago, took another one this year."
These 401(k) withdrawals are a result of the increasing unemployment in the country as well as companies cutting back on "overtime or overall hours" of their workers.
401(k) plans have "a provision that allows withdrawal of money from the plan" if an individual "can demonstrate ‘heavy and immediate financial need' and there is no other resource that an individual can use to meet the need." Many employers allow hardship withdrawals only for the following reasons:
•To pay the medical expenses of the worker, his/her spouse, or dependents •To pay costs related to the purchase of a principal residence •To pay a maximum of 12 months worth of tuition and related educational expenses for post-secondary education for an individual, his/her spouse, or dependents •To make payments to prevent eviction from or foreclosure on the principal residence
An employer will generally require that the employee submit a written request for a hardship withdrawal.
The disadvantages of withdrawing money from the 401(k) before it was intended include an overall reduction in the size of a person's retirement nest egg. Moreover, the funds that were withdrawn will no longer grow tax deferred. Additionally, hardship withdrawals are generally subject to federal (and possibly state) income tax in the year the money is withdrawn. A ten percent federal penalty tax may also apply if an individual is under 59 ½ years old. In addition, an individual may not be able to contribute to the 401(k) plan for six months following a hardship distribution.
The economic downturn has rippling effects in other ways as well. A survey conducted by the International Foundation of Employee Benefit Plans in May 2009 found that "the [economic] crisis has forced both defined benefit (DB) plan sponsors and defined contribution (DC) plan sponsors to make changes to their retirement coverage and plan design." The reexamination of offering pension benefits has resulted in "27 percent of DB plan sponsors [discontinuing] offering pension benefits for all or some employees and 21 percent have closed their plan to new participants."
Furthermore, there is also an impact on the employer match as DC plan sponsors "reduced or eliminated employer matches as a result of the economic situation." Sally Natchek, Senior Director of Research at the International Foundation of Employee Benefit Plans has said that "although the number of plan sponsors who have reduced or eliminated their employer match is relatively small, the number is still significant since any change tends to result in the employee lowering his or her contribution."
Thus, as companies make less profit, they decrease their overall retirement plan contributions; this, in turn, makes it less advantageous for employees to contribute to their own retirement plans. In some cases, the number of participants completely stopping plan contributions altogether has increased.
Moreover, in a study entitled 401(k) Plans in Living Color: A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups ~ The Ariel/Hewitt Study found that:
African-Americans are also more likely than the study population overall to have a loan and are more than twice as likely to take a hardship withdrawal from their 401(k) plans. Nearly two of every five African-American workers and almost a third of Hispanic workers borrowed from their retirement accounts compared to just one in five white workers. By contrast, Asian workers were the least likely to take a loan against their 401(k) plans, with less than one in five doing so. ‘These statistics are troubling because loans and withdrawals jeopardize long-term financial security to satisfy immediate needs. The impact is heightened during an economic downturn, when unemployment rises and withdrawals and loan defaults increase. We now realize this risk is magnified for African-American and Hispanic workers based on the results of our study,' said Barbara Hogg, principal at Hewitt Associates and co-leader of The Ariel/Hewitt Study.
All these factors result in a "substantial impact on employee efforts to save for retirement."
As Americans become more mired in financial hardship and worry, there is a domino effect which leads to even more stress and anxiety. The short term and long term financial effects are quite serious as people worry about layoffs coupled with a diminished ability to plan for retirement.
The irony is that saving into 401(k) was supposed to be the solution for a successful retirement for Americans and this dream is evaporating for too many.
When will Congress and the president put the brakes on an economic philosophy that is bringing misery to so many American workers?
Well, there is still food, clothing, taxes, transportation, medical care, and a few other expenses. But it is nice not having that $900/month gorilla in the room.
I stopped my contributions, but they made it so difficult to withdraw funds I left them in (they basically wanted a foreclosure notice, and I wasn’t there yet). I only contributed up to the maximum for the employer match, but didn’t see any point to that if I was building debt on cards. There is no doubt in my mind that these accounts will be used in calculating your “needs” and will reduce future SS benefits (to keep the program solvent); people should consider alternatives before using them.
Much useful info on this thread. Thanks to all for posting.
R U joshin' me? Seriously, what is a family supposed to do after the 6 months of savings are gone, and the laid off parent still has not found anything??? Better use the retirement and 401K than come after YOUR money, no? And it beats the cardboard home under the freeway.
Don't be so insensitive. People are suffering.
...or feeling it will be confiscated soon anyway:
Bend Over America: Now The SEIU Wants Your 401k!
Class Warfare’s Next Target: 401(k) Savings
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=521423
Government Plans to Loot Your Retirement Account
With those monthly bills not coming in. I should be able to bank away quite a bit before I retire in 3 years.
“I think excerpts encourage people to click on the link, which is only just to reward the author who wrote the piece and the site that published it.”
OTH, if you (as I do) have dial-up you wait and wait and then wait some more for the damn thing to come up. I appreciate it not being excerpted.
Indeed! The economic whoas many are experiencing are simply unprecedented in our lifetime. Yes, of course you’ll tape your 401(k) because it’s that OR leave your house and move on down to the mission. When you’ve suddenly crashed from having some financial stability to simply trying to survive — saving for the future isn’t an option. Families are making decisions they never thought they would — moving to locations they wouldn’t have driven through in the past! The NY Times had a six-part series on what they called “The New Poor”, that’s us, we’re there. It’s very uncomfortable and if Obama’s regime doesn’t do something to make small business and large corporations more comfortable about spending money, things will keep getting worse. I’ve written on the topic from my family’s perspective: www.newpoorzone.com.
Sui
I’ve dipped into my savings too.
It was the only way to get my 8 year old car fixed and my AC fixed.
no vacations for two years, no eating out, no take outs here at all and then I have to see this fool and his wife spending my tax money on their 5th vacation since July and the so called press are again silent.
I asked our book keeper if I could withdraw my 401, even thought I still work there (for now) and was told no.
Any expert out there know if that’s true?
Thanks 2ndDivisionVet.
I can see your point.
This will be my parents soon. Dad’s recovery is not going that well. But they do have a lot of assets.
Absolutely. I would do the same thing.
But most people did NOT have a 6 month savings. As I noted in an earlier post, the problem is national because as a nation we did not save for two decades. For every thoughtful person who saved there were myriads of those that not only did not save but borrowed against equity they already had in their houses.
Thanks 2ndDivisionVet. No bailouts in sight for 401(k) folks.
This is sorta off subject but I’ve been seeing a lot of commercials about buying gold. I know that an ounce of gold is over $1000 right now which I can’t afford. Would buying 10K, 14K or 18K jewelry at a discount and “hiding” it be a way to go?
Incidently, I have a very small 401K (only been with company 5 years)and I take a loan out (the max), still contribute, pay it back, rinse and repeat. I’ve used the $ to pay down my debt and now want to use it to sorta “invest” in something.
My remark was not about any specific person, however, but about the nation in general. As a nation, we've been saving no more that 1-2% for twenty years. As a nation, we've been withdrawing the equity in our houses at the rate of 8% in 2000s --- to remodel kitchens and bathrooms. As a nation, we've been upgrading our LCD TVs every couple of years. That is what the statistics reflect: the averages.
I agree that there are a number of people, higher than in the past, who lived well beyond their means. They fell when the first wave hit.
What we are seeing now, I believe, is folks who did save for a rainy day, folks who were prudent and didn't live extravagently, but have been looking for a job for a long time and are tapping whatever they have set aside to make ends meet.
I know too many good people who will do anything to earn an income, but get passed over because they are overqualified. One of my neighbors is delivering pizza because they were on the verge of losing everything. From a corporate office to delivering pizza.
It's getting a little crazy out there.
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