Don’t Let Plan Leakage Sink The Retirement Ship

After Social Security, retirement plan assets are Americans’ most important source of income in retirement. However, Secure Retirement Institute research shows too many Americans withdraw money from their employer-sponsored retirement accounts (also known as plan leakage) to address nonretirement financial challenges. According to the 2019 Census Bureau Current Population Survey, 15% of assets withdrawn from retirement accounts were by nonretirees ages 18 to 58. These withdrawals have the potential to undermine their future retirement security.

Understanding how Americans really think about plan leakage and the factors that encourage or deter them from turning to their retirement savings should be a critical part of the industry’s efforts. Encouraging consumers to save for retirement is important, but retirement plan leakage can undo years of saving in a moment. Consumers need help dealing with the financial demands of life without hurting their retirement security.

SRI conducted a two-day online bulletin board discussion with millennial and Generation X consumers in December 2020 to better understand why retirement plan leakage occurs, and what can be done to prevent it. Here are some of the most important takeaways.

The Dangers Of One Pot Of Money

We found there are two schools of thought when it comes to how consumers view assets in their retirement savings accounts. Some see these assets as part of their general wealth, available to be tapped if needed; others see their retirement savings as separate from their liquid savings and are more averse to withdrawing those assets to pay for things outside of retirement. 

For many Americans, their retirement savings represent the largest portion of their financial wealth. Without alternative savings accounts, the propensity to use these retirement savings assets is greater. One promising solution to this issue is the emergency savings account. Today, SRI research reveals more than a quarter of U.S. workers (26%) say they have only enough emergency savings to cover less than one month’s expenses, and nearly half (48%) report having only enough emergency savings to cover three months’ expenses or less. 

Helping Americans create an emergency savings account could help consumers avoid thinking of their retirement savings as an option to tap into when faced with a financial emergency. Advisors (as well as retirement plan sponsors and recordkeepers) should strongly encourage consumers to have emergency savings accounts in conjunction with their retirement savings. 

However, suggestions are often not enough to encourage saving when other barriers exist. In recent years, there has been a push for emergency savings accounts offered by employers. When offered, these are especially valuable for early-stage workers who may be struggling with student loan debt and have not established solid savings behaviors. Making it as easy as possible for workers to save is key. The retirement industry as a whole should expand access to and usage of these accounts. Although younger workers generally have fewer assets than older ones, helping them to save and leave their money in retirement accounts will pay dividends in the future. 

Proactive Advice Is Needed

Another critical reason to proactively encourage consumers to plan for the unexpected and set up emergency savings accounts is that by the time an emergency occurs and consumers need money, most have already made up their minds to take money out.

SRI research finds consumers tend to exhaust other options for funds first; once they have decided to turn to their retirement savings, it is too late. Instead of trying to talk consumers out of using their retirement savings in the moment, our research suggests that it would be more effective to proactively encourage a resilient savings mindset through planning and setting up separate emergency savings and retirement accounts before any leakage occurs. 

Our industry should play a vital role in helping Americans plan for and deal with the unexpected. Financial strains can happen to anyone, but being prepared can make all the difference when it comes to leakage. Financial professionals should proactively work with their clients at every stage in life to build a financial plan that helps them deal with the financial challenges they may face, so they don’t consider using their retirement savings assets in their working years and endanger their retirement security. 

Jonah Morales is a research analyst with Secure Retirement Institute. He may be contacted at [email protected].