Nearly half of workers who left their jobs during the recession cashed out their 401(k) plan benefits, with many taking penalties that reduced overall value, according to a new study by Lincolnshire, Ill.-based Hewitt Associates.
Despite HR and employee-benefits-industry efforts to caution workers about the long-range danger of taking money out of tax-favored retirement plans, the trend has continued from as early as 2005. In addition, younger employees, who might be thought to be more financially savvy, were the most likely to cash out their balances, the study indicates.
"Particularly during the economic downturn, employers and financial advisers have been increasingly vocal about the negative impact that cashing out of a 401(k) plan has on retirement savings," says Pamela Hess, Hewitt's director of retirement research. "But employees don't seem to be getting the message."
Hess says that, "in a society where less than one in five will likely to be able to meet their needs in retirement," improving and protecting retirement benefits is critical.
Even workers who kept their 401(k) balances in their employer plans or rolled them over to IRAs or other qualified plans will be hurt as the stream of contributions they planned for are interrupted, derailing their long-term plans.
Defined-benefit plans have also been weakened by the collapse of the equities market and employers' attempts to conserve cash by funding at minimum levels. But as the economy rebounds and the plan sponsors try to catch up, they may encounter more wide-ranging problems.
A research report from Optimal Benefit Strategies LLC, a Washington-based economic consulting and forecasting company, says increased pension funding as prescribed by the Pension Protection Act may hurt economic recovery by sapping cash that could otherwise be used for human resources and capital expenses.
The report, commissioned by the American Benefits Council, a Washington-based industry lobbying group, reveals that 68 percent of plan sponsors said unexpected retirement-plan expenses would cause them to make other cuts in areas such as hiring and training. For every dollar needed in mandatory pension funding to cover losses, 60 percent to 70 percent would have to be diverted from capital expenditures such as human resources and infrastructure.
James Klein, president of the ABC, says, "Requiring employers to increase their funding to DB plans during a recession leads to layoffs, bankruptcies and freezing of [the] plans." For relief, ABC supports the Preserve Benefits and Jobs Act, introduced in late October to scale back funding demands until the recovery is complete.
Len Strazewski can be e-mailed at email@example.com.