The Retirement Breach in Defined Contribution Plans: Size, Causes, and Solutions

Source: Matt Fellowes, Katy Willemin, HelloWallet, January 2013
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Well over half of U.S. employers use 401(k)’s and other defined contribution (DC) programs to encourage their employees to save for retirement, now collectively spending over $118 billion in match contributions and encouraging employees to save another $175 billion every year. Yet, over 25 percent of households that use a DC plan for retirement have withdrawn, or breached, their DC balances for non-retirement spending needs, amounting to over $70 billion in annual withdrawals. These trends challenge key legal and financial assumptions used to govern the DC retirement market …

…The findings indicate that employers are subsidizing an expensive retirement benefit that a large, and growing, share of workers do not use for retirement, signaling a broader misalignment between the advanced financial needs subsidized by employers and the basic, unmet financial needs of workers. Furthermore, because retirement plan breaching is not among the metrics reported by plan managers, this growing problem is largely invisible to employers sponsoring retirement benefits. Among our recommendations, we encourage employers and regulators to promote access to more personalized Total Rewards and talent management programs—with an increased focus on holistic money management needs —which more effectively align benefit spending with the actual benefit needs of their population. This will reduce costs for employers, improve worker engagement, and ultimately increase Rewards efficacy.