Troubling Signs for Poor Workers
Studies show more employees are dipping into retirement funds to pay bills while EAP calls for financial advice and help moving to cheaper housing are on the rise. HR can help financially strapped employees by working to limit hardship withdrawals and increase counseling and communication.
By Kristen B. Frasch
Opinions vary on the extent to which dipping into 401(k) retirement funds is dangerous and ill-advised, but one thing seems certain, according to experts and studies: A growing number of employees are doing just that -- robbing from their retirements to pay for seemingly more urgent needs or desires today.
Recent research of consumer-finance data from the U.S. Census Bureau and the Federal Reserve, conducted by Washington-based Hello Wallet, shows more than one in four U.S. employees are currently dipping into retirement funds to cover more immediate expenses.
The study, The Retirement Breach in Defined-Contribution Plans, finds more than 25 percent of U.S. households that use 401(k) or similar DC plans have used all or some of their savings for non-retirement needs, amounting to more than $70 billion in annual withdrawals. What's more, 75 percent of workers who have cashed out their entire 401(k) balances indicate they have done so because they face basic money-management challenges.
The study also finds these penalized withdrawals have increased from $36 billion in 2004 to about $60 billion in 2010, and that workers between 40 and 49 years of age are the most likely group to breach their savings.
"The findings indicate that employers are subsidizing an expensive retirement benefit that a large and growing share of workers do not use for retirement, signaling a broader misalignment between the advanced financial needs subsidized by employers and the basic, unmet financial needs of workers," Hello Wallet's Matt Fellowes, founder and CEO, and Katy Willemin, data analyst, write in their report.
"Furthermore, because retirement-plan breaching is not among the metrics reported by plan managers, this growing problem is largely invisible to employers sponsoring retirement benefits."
Despite how much or how little employers know about their employees' personal retirement-plan management, Liz Davidson, CEO of El Segundo, Calif.-based Financial Finesse, can attest to the fact that "all of us in the [financial wellness and advice] industry agree the loans and hardship withdrawals are a big deal; something we need to focus on and worry about."
According to survey data from her firm, 25 percent of lower-income employees indicated they had taken such withdrawals in 2011, compared to 35 percent in 2012. Similarly, only 33 percent reported being comfortable with their debt levels in 2012, compared to 41 percent in 2011. And those reporting having high or overwhelming financial stress went from 34 percent in 2011 to 39 percent in 2012.
"It's much, much harder to make ends meet when you're making less money," says Davidson. "[Lower-income workers] clearly have more obstacles; their sacrifices are indeed more drastic than any high-income person would ever have to face."
Similar to Financial Finesse's findings, Chicago-based global employee-assistance provider ComPsych is seeing a growing percentage of its work/life-related calls for help tied specifically to financial assistance -- from 8.6 percent in 2010 to 9.6 percent in 2011 to 15 percent in 2012.
In its 2012 Work-Life Trends report, financial assistance moved to the third-most-frequent request for EAP help, from sixth in 2011. Calls related to moving were the No. 1 most frequent work/life request in 2012, for the second year in a row.
"People are seeking less-expensive housing," says Roxanne Szczypkowski, ComPsych's director of work/life programs, "but compounding that, we're still seeing a lot of evictions. We help find them emergency shelters until" something more feasible and affordable can be found.
"And remember," she says, "these are people who have a job. When their hours are cut or their spouses lose their jobs, they are devastated. Even the payroll tax that just went up; that 2 percent has hit everybody. We're getting calls from people who say, 'Hey, I budgeted $100 for groceries, and they just took out $50 of that; now what am I going to do?' "
Szczypkowski also says her company is getting calls not just from lower-income workers, but from a growing number of professionals whose hours or jobs have been cut and they're now "forced to go back and re-evaluate their lives, take a look at their budgets, and re-evaluate mortgage and debt consolidation."
In addition, her firm's getting more calls "from other professional firms -- people who used to donate to food banks now finding they have to go to food banks themselves," she says. And parents are placing some of the most "anguished" calls of all -- looking for lower-cost summer camps, even charity and volunteer work for their bored and frustrated children who can't find work.
"For everyone seeking work/life help," says Szczypkowski, "our purpose is keeping them focused and productive in their jobs, so we establish to-do lists: 'I need to know my child is not going to be home alone all summer.' " Specific goals around living within one's reduced means are also established.
Indeed, for all people thrust into new income levels and for those who have never been able to climb out of their paycheck-to-paycheck lives, there are ways employers can help them better manage.
For one, says Szczypkowski, they can ensure their EAP and work/life programs "have expertise, not only in childcare and eldercare referrals, but also in being able to assist with more immediate and critical concerns, such as finding emergency housing and food, as well as community/state/federal financial assistance for utilities, prescription assistance, childcare subsidies and the like."
HR leaders, she says, "can then work with the provider to proactively promote the services, with communications that are relevant to their employee population's needs."
One policy Davidson sees more clients implementing is requiring employees to undergo financial counseling before being allowed to take out loans from their retirement accounts. "We've seen about half the people who go through such counseling decide not to take the loan after all," she says.
Going forward, she adds, with more companies doing auto-enrollment, "we may see balances go up, so withdrawals may go up. [In response,] I think more companies will start to limit the number of hardship loans they'll agree to."
But care needs to be taken in how such policies are enforced. Employers and their fund providers need to be realistic about the circumstances in each individual case. Taking from your 401(k), says Davidson, might not be the worst-case option when you consider the alternatives -- foreclosure, for instance, or not being able to afford an emergency surgery.
Also worth considering are the greater numbers of people -- even low-income -- participating in company retirement plans, which could be contributing to the higher number of hardship withdrawals in volume alone.
As Davidson puts it, "Yes, we should be concerned that fund withdrawals are going up, but that's being tempered by the fact that more people are participating ... . And if you look at the alternatives to those fund withdrawals, that they might even be worse, maybe some of these employees are [actually] being smarter with their retirement funds."
Nevin Adams, co-director of the Employment Benefit Research Institute Center for Research on Retirement Income, would probably concur. In a piece he posted in late January on ebri.org, entitled 'Breaching' Out? he takes aim at some of Hello Wallet's findings, writing that "these reports can't always know, and thus don't consider, how many participants and their families have been spared true financial hardship [such as eviction, foreclosure and the like] in the 'here-and-now' by virtue of access to funds they set aside in these programs."
He also writes: "It's hard to know how many of these 'breachers' would have committed to saving at the amounts they chose, or to saving at all, if they (particularly the young with decades to go until retirement) had to balance that choice against a realization that the funds they set aside now would be unavailable until retirement.
"We don't know that individuals who chose to save in their 401(k) plan did so specifically for retirement, rather than for interim (but important) savings goals -- such as home ownership or college tuition -- that, sooner or later, make their own contributions to retirement security," Adams writes. "Indeed, what appears to a be a short-term decision that might adversely affect retirement preparation may actually be a long-term decision to enhance retirement security with a mortgage paid off or higher earnings potential. In sum, we don't know that these decisions represent a 'breach' of retirement security -- or a down payment."