Although many defined contribution plan participants would benefit from setting aside more dollars in their retirement savings accounts, they at least are holding a steady course when it comes to tapping retirement savings prematurely. So concludes a recent research report from the Investment Company Institute (ICI).
The report, Plan Participants Activities During the First Three Quarters, 2014, found that 1.4% of participants took hardship withdrawals during that period, the same pace as the prior year. Total withdrawals during the period equaled 3.1%, similar to prior results since the 2008 financial crisis.
That year withdrawals totaled 3.7%, perhaps a surprisingly low level given the general disruptions caused during that years turbulence. But the subset of hardship withdrawals that year, at 1.2%, were somewhat lower than today.
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The financial crisis did manifest itself in the 401(k) world with a spike in the proportion of participants that stopped contributing to their plans. Between January and September of 2009, that figure jumped to 5% from three during the period period. And during the most recent period, the percentage stood at 2.7%--a proportion deemed as negligible by the ICI, albeit a slight uptick from 2.5% during the six-month period ending Sept. 30 2014.
Hitting contribution limits?
It is possible some of these participants stopped contributing simply because they had reached the annual contribution limit, suggested the reports authors.
As of Sept. 30, 2014, 18% of participants in the survey database had plan loans outstanding, showing little change over the previous decade. The lowest level since 2000 occurred in 2011, when only 13% of participants had outstanding loans.
Meanwhile, plan participants appear to be gaining confidence in their asset allocation decisions. The percentage that have made changes either in assets already in the plan, or for future contributions (8.1% and 5.6%, respectively) have generally trended downward over the past six years.
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Inertia may also play a significant role. For example, even at the height of the financial crisis, only a small minority of plan participants made changes. The high water mark for asset allocation switches to existing account balances occurred during the January-September 2008 period, when 13.5% made switches. The peak for prospective asset allocation shifts contributions occurred during that following year, when 9.8% made adjustments.
The ICI study was based upon a survey of large retirement plan recordkeeping companies, reflecting activity of 25 million plan participants.
Impact of disruptions
Meanwhile, a study released by TD Ameritrade has called attention to the high price people pay, in terms of their retirement preparedness, when one of various forms of financial disruptions occur in their lives. Examples include buying a house, divorce and major health problems.
About half of disrupted Americans need to withdraw funds from savings (including retirement savings), or borrow money, to see themselves through the disruption.
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Average pre-disruption monthly retirement savings were $500 in the TDAI survey, dropping retirement savings by almost $300 during that crisis period. The average period of reduced retirement savings is five years, resulting in an average of $16,000 less invested towards retirement, according to the TD Ameritrade analysis.
Depending upon the age of the individual when that period of reduced savings occurs, the impact on the ultimate amount of retirement capital can be highly significant.
What to do?
While disruptions are not generally caused by an employees personal decision to have such a crisis, the lesson employees need to hear is as follows: The key is to focus on what can be controlled; understanding ones retirement goals, regularly evaluating your portfolio and being prepared to make adjustments to your long-term strategy along the way can help you pursue your retirement plan, according to Lule Demmissie, who heads up the companys retirement services unit.
