American companies now spend $118 billion annually to improve employees' financial well-being in the years after retirement. But new research shows that this massive investment is not always delivering the intended results.
One in four U.S. workers participating in a 401(k) plan will access his or her plan savings before reaching retirement age, according to a study by HelloWallet, a provider of behavioral technology applications.
The study, which analyzed consumer finance data from the Federal Reserve and the U.S. Census Bureau, raises significant questions about the future of the bedrock retirement program as workers continue to migrate from traditional pension benefits toward defined contribution programs.
These workers either cash out their savings before retirement — paying substantial penalties and taxes — or forfeit them to loans, the study found. More than $70 billion is pulled out of their 401(k)s for non-retirement needs each year.
Penalized withdrawals alone increased from $36 billion to about $60 billion between 2004 and 2010.
"This research shows that employers are not getting the ROI that they may think they are from their retirement investments," said HelloWallet founder and CEO Matt Fellowes, who led the study. "Investing in retirement savings is essential for all Americans, but this study demonstrates that a large share of U.S. workers lack the basic financial skills needed to actually benefit from those savings, and it's costing both them and their employer dearly.
"While there is no question about the need for retirement savings, the issue raised by our research is whether employees are given the financial tools, including unbiased guidance, to make the best decisions every step of the way," added Fellowes. "These data strongly indicate that, for many workers, investment advice is misaligned with their investment needs and, as importantly, with their basic day-to-day financial needs."
The research also finds that only a small percentage of employees (8 percent) are withdrawing funds because they have lost their jobs. Instead, 75 percent of those who make early withdrawals have done so because they lack basic money-management skills and need to meet basic financial challenges, such as emergencies, credit card payments, and health care.
In many cases, better planning and guidance would put them on a track to avoid costly mistakes, take advantage of the tax incentives and accumulate the savings needed for retirement, HelloWallet said.