Data & Research December 19, 2017

Loans, Suspended Deferrals Reduce Savings an Average of 14%

The impact is greater for younger investors, as they have a long time horizon for saving, MassMutual finds.

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Loans, hardship withdrawals and suspended deferrals reduce American’s 401(k) savings by an average of 14%, according to research by MassMutual. The impact is greater for younger workers, as their time horizon for saving is longer than older people.

For example, a 29-year-old employee who is on target to retire at age 65 but who takes out a hardship withdrawal reduces their retirement readiness by 20%. By comparison, a 60-year-old who takes out the same withdrawal reduces their retirement readiness by 3%. MassMutual calculates the loss as lost interest earnings, taxes and penalties and the six-month suspension on salary deferrals that plan sponsors typically impose.

“MassMutual’s new analytic capabilities show there’s a real cost to employers as well as employees related to specific behaviors that reduce retirement savings and impair the ability of employees to retire sooner rather than later,” says Josh Mermelstein, head of retirement readiness solutions at MassMutual. “We are expanding our analytics capabilities to help employers and their financial advisers project these costs and take appropriate actions to keep retirement savings on target.”

To help workers stay invested, MassMutual recommends that employers consider putting a limit on the number of loans participants can take out, offer a match to incentivize workers to contribute to their retirement plan, educate participants about the negative impact of loans, offer financial wellness programs that cover managing debt and building an emergency savings fund, and ensure that participants are educated about proper asset allocation.
Client Service December 19, 2017

Participants May Evolve, But Some Things Remain the Same

Both retirees and workers still say the best piece of guidance in helping them prepare financially for retirement is knowing how much money they will need to be financially secure.

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Northern Trust Asset Management has published its 2017 Participant Survey, suggesting there is a clear shift occurring in the attitudes towards retirement savings, investing and expectations around retirement.

Yet some aspects of the retirement planning conversation remain the same. Notably, both retirees and workers still say the best piece of guidance in helping them prepare financially for retirement is learning how much money they will need to be financially secure. According to the Northern Trust data, 43% of workers say they estimate they will need $1 million or more to retire. Interestingly, only 25% of current retirees reported they needed a nest egg of that size.

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The data also shows the measures for long-term investing success are changing. Workers are more likely to look at account balances and monthly income compared with retirees as lead measures of success. Retirees, on the other hand, are more likely to look at investment performance as the lead measure for success, and they more often rely on a financial adviser to tell them how they are doing.

Additionally of note heading into 2018, Northern Trust says there is evidence that workers are “starting to care less about the actual managers of the products and more about the product’s objectives.” Specifically, less than half of current workers (47%) view the manager brand name as very important or critical in selecting the option, compared with 62% of retirees.

“Risk is always top of mind in retirement investing, but risk has many components that must all be understood,” researchers note. “While individuals tend to focus on the risk of losing money, it’s often equally important to think about the danger of not taking enough risk to meet your objective.”

The participant survey also shows evidence of an ongoing reevaluation of target-date funds.

“Target-date products are no the modular asset-allocation set it and forget it type options that asset managers first launched many years ago,” the analysis states. “They continue to evolve as greater focus is applied to understanding investors and their actual retirement needs.”

The data shows overall satisfaction with target-date funds remains consistent, with 91% of works satisfied with their funds. Satisfaction with respect to performance has improved 10% this year, to 92%.

Additional findings are available here.

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