Automatic enrollments don't guarantee people will put much into a 401(k) account. Photo Credit: MJ/TR/Flickr?CC-BY

A survey recently found that laws allowing employers to automatically enroll employees in 401(k) plans don’t work as well as was hoped. When workers automatically contribute to a retirement plan unless they opt out, they will often put in less than they would if they chose to start a plan.

Automatic contributions fall short of voluntary contributions

A recent study of 401(k) contributions found that a 2006 law giving employers the right to automatically enroll workers in a 401(k) plan has not been very effective in getting people to put more money toward retirement, according to the Wall Street Journal. The law was passed during the George W. Bush administration, which emphasized privatizing Social Security and other retirement plans. The onus was that if people had a 401(k) to contribute to, they would put more money aside into a retirement account. However, the Employee Benefits Research Institute found that most workers who are automatically enrolled into a 401(k) often put in far less than their counterparts who voluntarily begin contributing to a plan.

Most choose default setting

The study found that more than 50 percent of people who were automatically enrolled into a 401(k) plan would contribute 3 percent or less of their salary to their retirement accounts, or whatever the employer-set minimum contribution was. However, more people are contributing to retirement funds as total contributions to 401(k) plans has increased by 13 percent nationwide since the law was enacted in 2006. Aon Hewitt, a human resources company that administers a large amount of 401(k) plans, reported that 85 percent of employees participate — don’t opt out — in companies that use auto-enrollment on average and 67 percent opt-in at companies that don’t.

Next generation of retirees face cash shortfalls

Average contributions were found to have dropped slightly over the past few years, and most people are thought to not be able to rely on 401(k) savings alone for their retirement. The Government Accountability Office, according to Reuters, recently released a report stating that more people can expect outlive their retirement savings in coming decades and need to contribute more heavily to retirement accounts and look into annuities as a possible retirement booster. The GAO also recommends people wait until after retirement age to file for Social Security benefits. More people are expecting to work longer as well, according to WalletPop, as financial services firm First Command found in a survey. The First Command survey found that up to 22 percent of survey respondents between ages 25 to 70 who made at least $50,000 per year expected to work until at least age 70.

Sources

Wall Street Journal

Reuters

WalletPop

The number of people using their retirement accounts as a source of spare cash is increasing. Photo Credit: godfreja/Flickr.com/CC-BY

The number of people taking loans from their 401(k) accounts is reaching record highs. More people are resorting to taking money from their retirement accounts, which many advisers would say is not a sound financial move. Some members of Congress are trying to limit the number of times a person can borrow from their retirement funds.

Retirement accounts being raided

AON Hewitt, the human resources company of the AON Corporation, noted in 2010 that one in seven, or about 14 percent, of people who had a 401(k) managed by AON Hewitt had borrowed from their retirement account, according to SmartMoney. That was a 14 percent increase from 2009. During 2010, investment houses T. Rowe Price and Vanguard both noticed an 11 and 14 percent increase in 401(k) loans, respectively. It is thought that up to 28 percent of all people holding a 401(k) account have taken a personal loan from their own retirement account at some point. It is estimated that up to 30 million people may borrow from their retirement accounts by 2014, according to CBS.

Congress seeking to cap borrowing

In May of this year, Congress announced that it would be introducing a bill that would limit the number of times that a person could borrow from their 401(k). Senator Herbert Kohl, a Democrat from Wisconsin and namesake of the Kohl’s department store chain and the chairman of the Senate Special Committee on Aging, sponsored a bill called the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act. It was co-sponsored, according to Business Week, by Mike Enzi, a Wyoming Republican. The bill would limit the number of loans a person could borrow to three per person over their lifetime. Currently, there is no limit, and a person can take a loan against a 401(k) as many times as they want to, or are permitted to by their employer or plan administrator. The bill, according to Govtrack, was referred to the Senate Finance Committee in mid-May and hasn’t gone anywhere since.

Advantages to borrowing

Taking an installment loan from one’s 401(k) has some advantages and disadvantages. First, any interest or appreciation that the funds would have made while the loan is being repaid is lost. However, the interest rate on the loan itself may make up for any lost interest. If an account is only gaining 3 percent but the interest rate on a 401(k) loan is 6 percent, the borrower technically has doubled their gains for the amount of money that was borrowed. If the loan, according to SmartMoney, is used to pay off high interest debt, that is also a net benefit; essentially, a high interest debt has been replaced with a low one. Also, the thing about borrowing from a retirement account is that one pays ones’ self back, not a bank. That said, if one loses their ability to repay, or defaults on the loan, then retirement funds have been lost. Furthermore, the Internal Revenue Service imposes a 10 percent tax on early 401(k) withdrawals.

Sources

SmartMoney

CBS

Business Week

GovTrack

Internal Revenue Service

The United States Senate doesn't want people using their 401(k) accounts as a piggy banks. Image from Wikimedia Commons.

The United States Senate is currently considering a bill that would prevent people from using their 401(k) funds as a source for personal loans. The new legislation that is being put forth would potentially put a limit on how many times a person can draw from retirement accounts before retirement.

Retirement accounts are not piggy banks

A bill is going before the Senate that would put a permanent cap on the number of times a person can legally draw on 401(k) or other IRA funds before retirement, according to BusinessWeek. Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) are proposing the bill to limit withdrawals from 401(k) and other retirement funds in order to keep people from draining retirement accounts and jeopardizing their futures because of a temporary shortfall. Senator Kohl was quoted as saying that a retirement account is not intended for use as “a piggy bank.” The bill is called the “SEAL 401(k) Savings Act.”

Nearly a third of account holders borrow

By the end of 2010, almost 28 percent of all people who had some sort of 401(k) or similar account had an outstanding loan they took from the account, according to a study by Aon Corp, and the average balance was $7,860. Aon Corp also found that of the people who took out installment loans from their retirement funds, 58 percent had at least two outstanding loans. Aon also found that close to 70 percent of people who borrow from retirement accounts default. Fidelity Investments, according to USA Today, found that about 22.5 percent of 401(k) account holders with Fidelity had a loan balance outstanding at the end of 2010. This indicates that between one-fifth and one-third of people who have a 401(k) or other type of retirement account end up having to use it as a source of emergency funds.

Retirement becoming more daunting

The prospect of being able to retire one day, and to do so with confidence, is becoming more daunting for many people. Social Security, Medicare and Medicaid are typically pillars of security for retirees because portions of their paychecks have been going toward these programs for decades. However, it is becoming apparent that these entitlement programs may not be the guarantee they once were. Social Security is on track to becoming insolvent, and the Social Security Administration would need to raise $6.5 trillion to become totally solvent again, according to CNN. The Social Security Trust Fund is set to be depleted sometime within the next 25 years according to many estimates, and current Social Security payroll taxes won’t cover all outlays.

Sources

BusinessWeek

USA Today

CNN