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Retirement funds rules turn on workers

Jan. 15, 2013 at 4:01 PM   |   Comments

WASHINGTON, Jan. 15 (UPI) -- Nearly a quarter of funds U.S. workers stash in retirement accounts each year are withdrawn to pay current bills and meet other needs, a study indicates.

Data from the U.S. Federal Reserve's Survey of Consumer Finances and the Census Bureau's Survey of Income and Program Participation, indicates 30 percent of households with incomes of less than $50,000 per year had cashed out a retirement plan before retirement, a report by consulting firm HelloWallet found.

More than 25 percent of U.S. workers had tapped into retirement funds to pay everyday bills, including credit card bills, the study found.

In a separate study, 401(k) management firm Vanguard found the number of workers who had borrowed against their private retirement plans or had withdrawn money directly from them had risen 12 percent since 2008.

Increased 401(k) withdrawals mean an increase in hefty early withdrawal fees and taxes that need to be paid on funds withdrawn before a worker reaches retirement age, The Washington Post reported Tuesday.

Workers are also losing out on interest they could be earning if they kept the funds in the retirement accounts.

"We're going from bad to worse. Already, fewer private-sector workers have access to stable pension plans. And the savings in individual retirement savings accounts like 401(k) plans -- which already are severely underfunded -- continue to leak out at a high rate," said Diane Oakley, executive director of the National Institute on Retirement Security.

"What you have is 401(k) participants voting with their wallets saying they would much rather use this money for other purposes," HelloWallet Chief Executive Officer Matt Fellowes said.

Essentially, Fellowes said, if workers need the funds now to pay bills then putting it in an account with high penalties for withdrawal does the worker a disservice.

"In many cases, the only one benefiting is the vendor," Fellowes said.

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