Nearly Half of Younger Adults Treat Their 401(k) Like a Bank
By Linda Koco
Retirement savings are not proving to have much “stickiness” in younger adults. Nearly half — 47 percent — of experienced U.S. investors under age 34 told researchers that they made early withdrawals from their 401(k) plans. That’s according to a StreetWise, a survey conducted for online brokerage firm E*TRADE.
In general, tracking data throughout 2014 suggest that investors are struggling with being disciplined about retirement saving, the firm said.
Annuity experts who are reading this probably are nodding their heads knowingly. They see a lot of this,the low priority placed on saving for retirement, now among Generation Y (those born between 1977 and 1994) but among earlier generations when they were young too.
Agents and advisors say that some people have delayed retirement planning for so long that, when they finally do seek help, there is little that can be done with insurance, annuities or anything else, other than to say “cut back,” “keep working” and “save as much as you can.”
At least some of this lack of retirement urgency may be a matter of priorities, according to the researchers. For example, 58 percent of the under-34s reported that saving for retirement is “difficult” because — here’s the telling part — because they would rather spend on themselves today. When looking at all investors in the survey (not just the younger adults), 40 percent said the same.
In addition, half of the under-34s who’ve already made early withdrawals indicated they did so even though the 401(k) is their sole retirement account. Apparently, for them, retirement saving is for another day. Poof!
In the 401(k) arena, early withdrawal activity is a source of concern because the participant may be unaware of the associated penalties and taxes, to say nothing of loss in potential tax-deferred growth.
The impact on financial security in the retirement years has implications for retirement policymakers and industry as well.
A low priority on retirement saving is but one factor fueling the trend. Other factors are at work too.
Take cash-outs upon job termination. Younger adults tend to change jobs fairly frequently, so they may encounter the cash-out option more often than older plan participants who are settled at a particular
employer. That frequency can increase use of the option.
Modest accumulation values play a role as well. Due to fewer years worked, generally lower salaries and lower contribution percentages, younger participants tend to have lower account values than their older
coworkers. This can make cash-outs more likely. For example, among participants with a balance of $10,000-$130,000, the overall cash-out rate (all ages) is nearly 30 percent, according to a 2013 white paper
from Boston Research Group. But for those with $100,000 or more, the rate is under 10 percent.
Emergency or hardship withdrawals need a mention as well. Not all plans allow such withdrawals, but when they do, participants can take money out for specified expenses such as first home purchase, funeral, higher education, medical costs, etc.
The 401(k) design is a consideration too. Here, plan size, features, auto enrollment and escalation features, educational support, and access to advice all influence how willing participants are to stick
with their plan — or raid it.
A word about advice: The E*TRADE study examined withdrawal activity of “self-directed” investors who have at least $10,000 in an online brokerage account. Self-directed refers to investors who manage their
own money and who may or may not consult with a personal advisor along the way.
Given the low priority that the under-34 crowd puts on retirement savings — so low that they will pull from their only retirement account in order to spend now — perhaps the nation’s younger adults need to consult more than online information and guidance. If they are seriously considering making an early withdrawal, a consult with a knowledgeable, unbiased expert might be a high priority. Even if it’s a
hardship situation, this professional may know of options the participant never realized existed.