With federal policymakers eyeing cuts to Social Security benefits and Medicare to rein in soaring federal deficits, and traditional pensions in a long decline, retirement savings experts say the drain from the accounts has dire implications for future retirees.
“We’re going from bad to worse,” said Diane Oakley, executive director of the National Institute on Retirement Security. “Already, fewer private-sector workers have access to stable pension plans. And the savings in individual retirement savings accounts like 401(k) plans — which already are severely underfunded — continue to leak out at a high rate.”
A report due out this week from the financial advisory firm HelloWallet found that more than one in four workers dip into retirement funds to pay their mortgages, credit card debt or other bills. Those in their 40s have been the most likely culprits — one-third are turning to such accounts for relief.
Fresh data from Vanguard, one of the nation’s largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008.
The most common way Americans tap their retirement funds is through loans, which must be repaid with interest. Those who withdraw money face hefty penalties. In most cases, they not only incur a 10 percent federal tax penalty but also pay income taxes. The costs are financially harmful to families even as money-management firms reap massive fees for handling retirement accounts that ultimately are not used for retirement.
In addition, employers often are subsidizing the accounts with matching contributions on the assumption that the money is helping to secure their employees’ retirements.
“What you have is 401(k) participants voting with their wallets saying they would much rather use this money for other purposes. I don’t think this can be ignored. Employers are dramatically overpaying for retirement, but it is not benefitting the employee,” said Matt Fellowes, a former Brookings Institution researcher who is chief executive of HelloWallet. “In many cases, the only one benefiting is the vendor.”
Since 401(k)s were created by Congress in 1978, concern about the pervasive use of retirement funds for other expenses has grown as other means of retirement security have dwindled.
In 1980, four out of five private-sector workers were covered by traditional pensions that paid them a fixed benefit based on their salary and length of service once they retired. Now, just one in five workers has a pension, leaving 401(k)s and similar retirement savings accounts as the primary vehicles for retirees to supplement their Social Security benefits.
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