Are DC Plan Sponsors Funding Retirement?

A report from HelloWallet says more than half of U.S. employers use defined contribution plans to encourage employees to save for retirement and spend more than $118 billion in match contributions. Yet, more than 25% of households that use a defined contribution plan for retirement have withdrawn balances for nonretirement spending needs, amounting to more than $70 billion in annual withdrawals.   

According to the report, 75% of participants who cash out their entire balance indicate they have done so because they face basic money management challenges. More than 27% of workers living in households with unmet basic financial needs, like budgeting and emergency savings, breach their retirement savings, compared to 8% in households with advanced financial needs, like the need to save more for retirement or optimize their investment portfolio. Similarly, workers are up to six times more likely to take out a loan of their DC balances if they do not have sufficient emergency savings.  

The research found the percentage of taxpayers with retirement accounts or pension coverage that receive a penalty for nonretirement withdrawals increased from 7.9% in 2004 to 9.3% in 2010. Workers between the ages of 40 and 49 are the most likely age group to breach their retirement savings.  

Among the implications discussed in the report is that the data indicates many plan participants are receiving investment advice that is misaligned with their investment needs (short-term savings should be in money market accounts, not equities and bonds); drives up the cost of their savings (mutual fund fees, trading fees, investment advice, etc, is not needed for short-term savings needs); and increases the likelihood of a tax penalty (distribution penalty).