Stop Retirement Savings Setbacks

Insight By
Mike Iley
Retirement Plans

The global pandemic has had a staggering effect on the economic lives of millions of people, driving them to actions that could have long-lasting effects on their retirement savings.

Individuals who lack adequate emergency savings are turning to retirement plans to address their financial shortfalls. Additionally, hardship withdrawals have been made easier by the passage of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act expanded distribution options, offered favorable tax treatment for coronavirus-related distributions from eligible retirement plans, and relaxed payback options for those who met specific criteria.[1]

A reported six percent of retirement plan holders took advantage of at least one CARES Act provision offered by the plan. Of these withdrawals, 21% took the maximum amount allowed under the Act ($100,000 or 100% of the vested balance).[2]

Plan leakage consequences

Overall, retirement plan leakage - which includes in-service withdrawals, cash-outs at job change, and loans - can create savings repercussions and a delay in retirement, even if the amounts are paid back.

In a single year, Employee Benefit Research Institute (EBRI) reported that $92.4 billion was lost due to leakages from cash-outs.[3] This is a serious problem as it can reduce aggregate 401(k)/IRA wealth at retirement. Essentially, money withdrawn early loses its potential for growth and interest accumulation, hindering its ability to produce adequate income replacement in retirement.  

For those who still consider tapping into their retirement plan savings, they may be doing so as a result of a lack of emergency savings, something that is increasingly prevalent, according to a recent Bankrate study.[4]

  • In 2020, about three times as many Americans report having less emergency savings now than before, compared to those reporting more savings.
  • Approximately 21% of Americans say they have no emergency savings, the lowest rate in the 10-year history of the Bankrate poll.  

These staggering facts point to the importance of having a robust financial wellness program in the workplace and by placing special emphasis on maintaining an emergency savings account, which employers can offer via payroll deduction.

Curbing savings damage

Separating emergency or “rainy day” savings and retirement savings accounts can have a practical impact, too. It can reduce the urge to give into short-term wants and separate long-run retirement savings needs.[5]

Participants should be aware of these financial factors when making retirement plan withdrawals:[6]

  • Repayments to a retirement plan are made with after-tax dollars that will, in turn, be taxed again when they eventually withdraw them from an account.
  • The fees paid to arrange a retirement plan loan may be higher than a conventional loan, depending on how they are calculated.
  • The interest is not tax deductible even if you use the money to buy or renovate a home.

Benefits of financial education

Employers can work with LoVasco’s Retirement Plan Consultants to find ways to educate participants in today’s remote work environments; for example, an employer could promote LoVasco’s Financial Wellness webinars to employees, or suggest employees sign up for a one-on-one session with one of our financial professionals.

In these volatile economic times, it’s especially relevant to cover important topics that may help participants maintain a healthy retirement savings strategy including:  

  • Maintaining retirement plan contributions and not being influenced by market activity.
  • Reviewing historical market trends on downturns and recoveries.
  • Resisting plan withdrawals by looking at alternative sources such as home-equity loans or refinancing to take advantage of low-interest mortgage rates, personal lines-of-credit or even borrowing from a family member.  

Despite the uncertainty brought on by the pandemic, employers have resources to get help toward ensuring employees make sound retirement savings decisions today, and in the future.  

Insight By
Mike Iley
Managing Director
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Retirement Plans
Published on

November 15, 2021

updated on

November 15, 2021


This article is for educational purposes only. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that LoVasco Consulting Group is not engaged in rendering tax or legal services. If tax or legal advice is required, you should consult your accountant or attorney. LoVasco Consulting Group does not replace those advisors.

Securities and Investment Advisory Services offered through M Holdings Securities, Inc., a registered broker dealer and Investment Advisor, member FINRA / SIPC. LoVasco Consulting Group is independently owned and operated.

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LoVasco Consulting Group and their agents are presently licensed to sell traditional life insurance in Michigan as a resident producer and numerous other states as a nonresident producer. This site is not intended as an offer to sell securities, which may be done only after proper delivery of a prospectus and a client suitability review. Proper state registration is mandatory prior to conducting business in any state. Securities and Investment Advisory Services offered through M Holdings Securities, Inc., a registered broker dealer and Investment Advisor, member FINRA / SIPC. Check the background of this Firm and/or investment professional on FINRA's BrokerCheck. LoVasco Consulting Group is owned and operated independently from M Holdings Securities, Inc. LoVasco Consulting Group is a member of M Financial Group. Please click here for further details regarding this relationship.