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 Moreover, the funds that were withdrawn will no longer grow tax deferred.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hardship withdrawals are generally subject to federal (and possibly state) income tax in the year the money is withdrawn.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?
The Government doesn’t mind at all that a person withdraws money from their accounts. They charge extra taxes so the gov. is making more money off of the hardship of the working people. Isn’t government great!
I borrowed as much as I could from my 401k for my farm in Kentucky. It wasn’t hardship. It was getting a galt’s plateau with the cheapest money possible.
Exactly!
Thanks guys
It is people who are desparate and out of money.
Maybe they will get smart and cancel cable/sat TV because ALL of TV supports Obama and keeps him in power. The American public is so manipulated by TV but they are too stupid to care.
The thing that happens during a liquidity trap is that people do unusual or desperate things to find the credit that they need.
Credit is scarce during a liquidity trap.
But selling things to obtain cash or credit creates more sellers than buyers, so prices fall.
Deflation.
Amen and ditto. Too many blog pimpers around here.
One of them is using a variant on my screen name. He's OldPossum1 and if you examine his history it's nothing but a series of posts with him as the poster and he makes no other posts on FR.
He just uses FR to direct hits to his blog.
That may or may not be true ... but my original intent was to alert those who blindly already paid the 10% penalty they may be able to recoup that dough ...
This rule was in effect since last year .. I do not know about 2008.
The reason Americans have not saved is because we are taxed to death and hit with inflation. Some are taking money out of their 401k accounts now, because they think the government is going to confiscate the money. I would not be surprised.
Just finished mine off. Ate the penalty - paid the taxes. (Who really knows what the tax rate will be 10 to 20 years from now anyway?) Social Security rules seem to change annually and more banks are going under ever day. So I'm taking the loot now - while it's still there.
Do you know if it applies to a SEP account? I have some money in an account that I set up when I was self employed. I never rolled it over into my 401K that I have with my current employer. I have more than enough in the SEP to put a big down payment on a farm I have been thinking about.
Or maybe they're "get my money out before the democommies steal it" withdrawals.
I’m being flippant...
My father (WW II vet) reminded me that fascist government pigs and their “army” bleed and die like anyone else.
Carry on, FReeper...
My wife had lunch with a lady today who owns 3 real estate offices with her son and they were just warned by the banks that the second wave of foreclosures are coming. There were solid loans and not pie in the sky appraisals but the unemployment picture is hitting these families...
I’m a loan originator, so you can imagine what my days are like.
“Look to Argentina and you can see the future of 401K’s in the US. The fed gov’t will grab all of them in due time to “sure up the Social Security system” or whatever excuse they can come up with.”
The Democrats have introduced a bill that will raid your retirement savings. The bill is a stealth asset grab. John (please elongate the pronunciation) Kerry is a cosponsor. The Democrats are plotting to seize control of retirement assets.
If such a bill passes, it's time to invoke the second amendment for its intended purpose. Fire for effect.
What Good Can a Handgun Do Against An Army?
http://www.freerepublic.com/focus/f-backroom/2312894/posts
I stopped putting money in 401k’s years ago, they’re a scam, take that money and pay down your house, you’re never going to see a dime of your 401k folks.
So what comes after the house is paid off?
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