The WSJ is reporting today on the onerous impact of “leakage” from defined contribution plans. It’s about time! We’ve referred to defined contribution plans as “glorified savings accounts” for the very reasons that individuals can borrow, initiate premature withdrawals, and eliminate or adjust funding (as can their employers). The impact from these activities can cripple the long-term growth potential of the account while leaving the plan participant broke in retirement.
The demise of the traditional DB plan and the lack of financial literacy are combining to create a retirement crisis in this country. The fact that the WSJ is just reporting on it today is frightening. According to the National Institute on Retirement Security (NIRS) the median retirement balance for a US household is only $3,000.
The practice of tapping into one’s 401(k) plan is growing. “401(k) plan leakage amounts to a worryingly large sum of money that threatens to undermine retirement security,” says Jake Spiegel, senior research analyst at research firm Morningstar Inc. His calculations show that employees pulled $68 billion from their 401(k) accounts, taking loans and cashing out when changing jobs in 2013, up from $36 billion they withdrew in 2004.
The lack of wage growth since 1999 for the average worker and the growing number of potential workers no longer in the work force (estimated at >94 million) are exacerbating this issue. Furthermore, as we reported last week, the cost of college education is leading many parents to borrow from their retirement accounts to help fund education for their children, who are also borrowing at record amounts so that they can pursue a degree.
There will be profoundly negative social and economic ramifications from these actions!