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 Moreover, the funds that were withdrawn will no longer grow tax deferred.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hardship withdrawals are generally subject to federal (and possibly state) income tax in the year the money is withdrawn.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?
I'd say hold on until after the November elections. If the Democrats still run both houses, take it out. If the GOP takes over at least one chamber, especially the House where most financial bills originate, the chance of the government seizing your 401k would go way down. Sure, there are RINOs and nothing is guaranteed, but I just can't see a GOP-controlled congressional chamber allowing this to happen because they'd know how badly the private sector would suffer and how Republican voters would tar and feather them for doing so.
My mother closed all her accounts years ago and used the money to pay off the rest of her daughter's house in return for a promise to live there if she ever got so destitute that she had no place else to go.
Mom wound up living off her deceased husband's VA and SS benefits and never needed to move in with her daughter until she died. So my sister no longer has a monthly house payment. Your miles may vary, but it's an option to consider.
At my work, they offer loans that can be made against your 401K.
I’m not sorry to say that I did it. The interest rate on my loan was significantly smaller than the interest rate on the credit cards I paid off with my loan.
Fingers crossed that I’ll never have to actually take money out of my 401K...
I appreciate the advice, O-H, but I got this nagging feeling to buy some Silver.
The 'coin-of-the-realm' in silver may be worth something, but the paper will be worthless.
Feels like that nagging 'Wiemar' thing again ................ FRegards
If one thinks about what is happening to so many people across the country...it would tend to make one depressed.
However, I try to look at everything that is happening as a prelude to taking our country back.
I’m so sorry that so many people are in such dire straits, though. I hope they will let their preferences be known on November 2, 2010.
You have more faith in the GOP than I do, O-H, and I've been here forever.
And there's that nasty business of the 'Lame-Duck' time between November and January ...................... FRegards
Yeah - it's time ......................... FRegards
Cable is a NECESSITY! Fox News is the ONLY news channel available for truth. And without Glenn Beck there would be no REAL hope.
“2) If you take it out as a payment, you get hit with high taxes twice - first at the time of withdrawal and secondly as income. When I did it, there was no preconditions for hardship and I did not have to get permission from my employer. I’m also below age 59.”
Actually you will pay a 10% penalty for the withdrawal and then you will be taxed at your current rate.
At age 59 1/2, one can roll 401K to an IRA. Can you continue contributing to the 401K ?
Thx for the info!
You pay tax up front on the Roths, but the earnings are tax free. It really depends on what tax bracket your in and what tax bracket you are likely to be in when you retire.
I do both. I contribute just enough to the regular 401K to lower my marginal tax bracket to 15% and then contribute the rest to the Roth.
Great post and yet another grave concern about our economy. Combine this with the widespread epidemic of credit card fraud cases and fake $100. SUPERNOTES ! I am sure some folks are pulling out of their 401k because they are concerned that the value will soon be ZERO! Taking the hit on the penalty is better than ending up with NOTHING. Ugh and again I say ugh!
Given these THREE major factors which adversely affect our economy which direction do you think the DOW will go on Monday oh and then we have SUPER Tuesday FLORIDA PRIMARY. Looks to be a major downswing for markets nextweek I am afraid. I might be wrong but I won’t bet on it. I moved my entire portfolio to cash a week ago.
I wouldn't be so quick to judge. Many early withdrawls are due to medical hardships, the need to reduce/eliminate one's debt, or the need to try and get one's head back above water or simply tread water, financially speaking.
In each case, it's a difficult decision to have to make due to the tax implications of each choice, and yes you do know that you're short-changing your future by having to make these choices.
This is the economy we live in, thank you Barack Hussein Obama (you sorry ass poc.)
>>When will Congress and the president put the brakes on an economic philosophy that is bringing misery to so many American workers?
According to Marx, Alinsky, Cloward, Piven, and Baraq Obama: only when capitalism is completely destroyed and the people are demanding the new order.
:-)
I was trying to get some idea as to what one would do with the money that they had withdrawn from their 401K or IRA after they no longer had any house payment. Assuming that the JBTs in Washington are going to go after these tax-deferred savings to pay for the enormous debt that they've incurred, where could one put that money where the government could not touch it? Or at least not without taking on casualties.
I have no house payment. I still have an IRA and a newer 401K. I don't want them stolen from me.
We're already past the 'tar and feather' stage. If any elected official votes to steal the accumulated wealth of the citizenry in this manner, they will be painting a target on their own head.
You don’t bother giving them hits anyway, it seems, if they post the entire thing.
I am not talking about posting one sentence. Of course, enough should be posted to tell the reader whether or not they want to continue the piece. That’s just good manners and net etiquette. Even so, no one is making the reader go to any link unless he wants to read further; that is his decision, regardless how large the excerpt is.
I think it’s just rude (if not worse) to take someone’s entire piece and post it on another website, especially without their permission.
Plus, providing content is a service to the entire internet community, one that often is dependent upon ad revenues. We expect FReepers to kick in some each for this site to keep going. I don’t see a difference in supporting any other site, even just with clicks, if we use that content.
What would we read and talk about here if people didn’t provide content? For those not on the MSM payroll, especially, hits are important and page loads determine ad revenues. Even within the more MSM, hits are important — they tell authors and editors which stories have legs.
Yep, we know all about the fickle crowd around here.
I expounded upon my views in a post upthread.
And, of course, I know you would not be lifting a piece if it were required to be excerpted. You’re actually one of my fave threadmakers.
So, carry on, eh.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.