According to the survey report, “Repairing the Damaged Retirement Nest Egg: How to Improve
the Retirement Outlook of the Unemployed and Underemployed,” part of the 14th Annual
Transamerica Retirement Survey, 62% of displaced workers are “not
too” or “not at all” confident about their retirement prospects.
The ultimate objective of the study was to shine a light on the tens of
millions of Americans who are still looking to regain their financial footing,
said Catherine Collinson, president of the Transamerica Center for Retirement
Studies. The economic downturn resulted in unemployment or underemployment for
many, she noted. Transamerica also wanted the study to help highlight
opportunities to help displaced workers get back on track with their savings.
The findings present a sobering reality of the
challenges that the unemployed and underemployed face, Collinson told
PLANSPONSOR. Collinson uses the word “displaced” to refer to both groups of
workers. Even amid signs of economic recovery and an unemployment rate that has
been showing signs of improvement, millions of Americans are still unemployed
or underemployed, Collinson pointed out.
“Many displaced workers have raided their retirement
accounts to make ends meet, and many may be overlooking the importance of
retirement benefits as they seek meaningful employment. It’s critical that we
raise awareness of the issues and identify opportunities to help them rebuild their
long-term financial futures,” she said.
Fifty-nine percent of displaced workers report having a
retirement savings account of any kind, the study found. But, despite a
widespread recognition of the taxes and penalties that may apply, more than one-third (36%) of displaced workers who have retirement accounts have made
withdrawals because of their financial predicament.
Collinson said plan sponsors should consider including some
guidance about how to handle retirement accounts, with a strong educational
message about the risks of taking loans. “Further underscore the consequences of
taking early withdrawals to employees,” she said. It may not be the most
cheerful news, she added, but having more knowledge could lead to better
decisions on the part of plan participants.
“Some leakage
comes from participants who had outstanding plan loans at the time of
separation,” Collinson observed. Plan loans, typically on a five-year repayment
plan, might be a wolf in sheep’s clothing, she said, since statistically people
change jobs more often than five years. If the employment is ended, the
repayment period is much shorter, and if the employee can’t repay the loan, it
turns into taxable distributions. “Statistically speaking, a significant number of plan sponsors offer multiple loans,” she said. “But
are multiple loans really necessary?”
A simple thing plan sponsors can do for all employees is
promote awareness of the saver’s credit for low- to moderate-income workers to
save for retirement, Collinson said. “The second thing employers should do is
to keep the faith in offering competitive retirement benefits. Make the plans
as efficient as possible with auto features so that people who are displaced
can begin saving again as soon as possible, as soon as they regain employment.
“The passage of time out of work, especially the one-year
mark, can have a detrimental effect on retirement accounts,” Collinson said.
“Forty-two percent of those displaced for a year or more took a withdrawal
compared with only 23% of those displaced for less than a year.”
Of
those who participated in a 401(k) plan at their most recent employer where
they were fully employed, 43% indicate they have taken a withdrawal from their
accounts, including 53% of the unemployed and 38% of the underemployed. “While
being underemployed is certainly not ideal, statistically it is better because
people are not as forced to tap into retirement accounts to make ends meet,”
Collinson said.
Another
sobering figure, Collinson noted, is that median savings of all displaced
workers, both with and without a retirement account, is $7,500. “Those in their
40s have been especially hard hit,” she said. People in their 40s showed median
savings of $1,900, and also showed the highest level of withdrawal activity.
Collinson,
who described herself as someone who obsesses over numbers, said she was really
astonished at the difference in estimated median household savings between
those with college degrees versus those with high school diplomas. The
difference in estimated median savings is “huge,” she said: Displaced workers
with a college degree have saved an
estimated median of $60,300, versus those with a high school diploma or some
college, who have saved $3,300. “So there is an even higher cost associated
with not having a degree,” Collinson said.
The
underemployed report higher levels of retirement savings at an estimated median
of $8,600 compared with the unemployed at $6,500. The study also found that the
underemployed are faring better than the unemployed in terms of income, health
care benefits and general outlook.
“Many
displaced workers may be overlooking the importance of retirement benefits when
seeking employment opportunities, which could put them at a greater
disadvantage in terms of rebuilding their retirement savings,” Collinson said. Only
17% of displaced workers cite generous retirement benefits as one of their top
three most important characteristics of a future employer. The majority (56%)
say competitive pay, followed by company stability (33%) and a convenient
commute (31%) are most important to them.
Fifty-five
percent of respondents prefer a job with higher pay but poor retirement
benefits. In making this trade-off, they are placing a higher priority on
immediate financial goals but may be overlooking retirement benefits, which can
be a meaningful part of their compensation package to build a more secure
long-term financial future.
“From
a public policy perspective, our current retirement system is largely
predicated on the assumption that workers have access to meaningful employment
so that they can self-fund a substantial portion of their retirement,”
Collinson said. “If displaced workers fail to overcome retirement savings
setbacks due to unemployment or underemployment, society may ultimately bear
the cost when future generations of senior citizens run out of savings.”
A
10-minute online survey was conducted by Harris Interactive on behalf of the
Transamerica Center for Retirement Studies between March 5 and March 19 among a nationally representative
sample of 610 unemployed or
underemployed U.S. residents, age 18 or older. Survey respondents were
previously fully employed in a for-profit company employing 10 or more people
and were unemployed or underemployed at the time of the survey.
The
full report can be viewed online.
Jill Cornfield