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How Much Do Participants’ Negative Behaviors Affect Retirement Readiness?

Participants dipping into retirement savings early and suspending contributions to their 401(k) plans is projected to reduce their retirement savings by 14% on average, new analytics from MassMutual show.

The impacts include delayed retirements and higher employer costs for salaries and benefits as their workforce ages. According to the analytics, a typical 40-year-old worker who is on target to retire at age 65 but then borrows 30% of the savings in his 401(k) could potentially reduce his available retirement income by 15% and delay his retirement by five years.

The impact of behaviors that negatively affect retirement readiness varies with age, MassMutual’s data show, with younger employees most likely to participate in, as well as suffer the most from, such activities. For example, on average:

  • a 29-year-old employee who is on target to retire at age 65 but then takes a hardship withdrawal reduces his or her retirement-readiness by 20%; and

  • a 60-year-old employee who is on target to retire and withdraws the same amount typically reduces his or her retirement readiness by 3%.

The loss of retirement readiness reflects the value of lost interest earnings on the withdrawal before retirement, taxes and penalties, as well as a six-month suspension in salary deferrals, which typically happens when retirement plan participants withdraw savings.

MassMutual notes that projecting the cost of behaviors that can erode retirement savings and reduce retirement-readiness enables employers to better manage their retirement plans by:

  • deciding whether to allow or limit the ability of employees to take loans or withdrawals from their retirement savings;

  • ensuring retirement savings incentives such as matching contributions are used as intended, to help workers better prepare for retirement;

  • educating workers about the negative effects of loans, withdrawals and deferral suspensions on their ability to retire and encourage them to avoid such behaviors;

  • providing programs that educate workers about financial issues such as budgeting, debt management, retirement planning and related topics; and

  • educating employees about appropriate investment choices and asset allocations based on their retirement goals and time horizon to help employees more effectively accumulate and protect savings over the long term.

The new analytics are the product of enhancements to MassMutual’s Viability program. The enhancements calculate employers’ potential liabilities associated with behaviors that interrupt retirement savings, including taking loans or hardship withdrawals, suspending salary deferrals, or opting out of behavioral finance initiatives such as automatic enrollment or automatic deferral.