401(k) savers are making big mistakes
American workers are making plenty of mistakes with their retirement savings plans that could cost them big time after retirement, says the Director of the Boston College Center for Retirement Research.
Alicia Munnell said that an increasing number of employees using 401(k) plans are taking loans from their accounts, not contributing enough, and not rolling over their accounts when they change jobs, reported Investment News, a trade publication.
Just a few years ago only 9 percent of employees took loans from 401(k) plans but that number increased to 18 percent last year, said Munnell, co-author of the book “Coming Up Short: The Challenge of 401(k) Plans.”
Not rolling over
Even worse, some 45 percent of employees who change jobs do not roll over their accounts into a new employer’s savings plan or an individual retirement account.
The majority of workers who use their 401(k) plans—some 89 percent - do not contribute the maximum amount possible.
These trends are troubling, since Federal Reserve survey statistics show that nearly 60 percent of workers will depend on just Social Security and income from their employer savings plans for retirement.
Traditional pensions that promise a lifetime monthly income are now offered by a minority of employers.
The Fed’s triennial survey of consumer finances found that the average family preparing for retirement—in the age range of 55 to 64—has just $42,244 saved in an account through a contributory plan at work.
401(k) automation
Munnell and others argue that 401(k) plans should be made less voluntary, with mandated automatic enrollment, automatic contributions, and even automatic annual increases to contributions.
Some studies have shown that employers who adopt automatic enrollment—which forces an employee to make an “opt-out” rather than an “opt-in” decision - brings many more participants to plans.
Forcing employees who change jobs to roll over their balances to a new plan has also been advocated. Under current tax law those who don’t pay full income taxes on their withdrawals plus a 10% federal tax penalty if they are younger than 59.5.