Wednesday, January 16, 2013

401K Accounts Draining - Are Americans Getting the Message?

401Ks are being raided by the owners -
A large and growing share of American workers are tapping their retirement savings accounts for non-retirement needs, raising broad questions about the effectiveness of one of the most important savings vehicles for old age.

This could be good or bad. If workers are tapping into funds because they're destitute or they don't trust the system, that's one set of problems. But if they're cannibalizing their accounts to maintain their 'lifestyle', then - Houston we have a problem. Let's look further...
More than one in four American workers with 401(k) and other retirement savings accounts use them to pay current expenses, new data show. The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans.
Uh oh, current expenses? This is a bad report.
A report due out this week from the financial advisory firm HelloWallet found that more than one in four workers dip into retirement funds to pay their mortgages, credit card debt or other bills. Those in their 40s have been the most likely culprits — one-third are turning to such accounts for relief.

Fresh data from Vanguard, one of the nation’s largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008.
So, Gen Xers and the tail-end of the boomers are sinking? That matches the employment data that's been coming out lately.
The most common way Americans tap their retirement funds is through loans, which must be repaid with interest. Those who withdraw money face hefty penalties. In most cases, they not only incur a 10 percent federal tax penalty but also pay income taxes. The costs are financially harmful to families even as ­money-management firms reap massive fees for handling retirement accounts that ultimately are not used for retirement.
This reveals that Gen X thinks things are going to get better in the future. Why else would you face penalties?
“What you have is 401(k) participants voting with their wallets saying they would much rather use this money for other purposes. I don’t think this can be ignored. Employers are dramatically overpaying for retirement, but it is not benefitting the employee,” said Matt Fellowes, a former Brookings Institution researcher who is chief executive of Hello­Wallet. “In many cases, the only one benefiting is the vendor.
Aha! Now we come to the truth. In order to circumvent the burdensome tax code, Congress decided to permit an individual to give a third party their money to save for a legitimate cause. Of course exceptions don't come cheap and someone has got to pay. In actuality, this ends up being a boon for the companies. So the real effect is that Congress threw the private sector a bone.

And don't forget, if you make a 'mistake' you can lose the whole lot or end up in prison. Sounds about right for government led 'solutions'.

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