Preventing Financial Regrets
Alison Cooke Mintzer (photo by Chris Ramirez)
We know making the right financial decisions can be difficult. And many of us don’t always make smart ones. In fact, a recent survey from Bankrate.com suggests that three in four Americans say they have serious financial regrets.
More than half (56%) are disappointed with their overall savings, including 27% who wish they had started saving earlier for retirement, 19% who lament not saving more for emergencies and 10% who say they have failed to save enough for their child’s education.
Think about that: More than half are disappointed with their overall savings. We know how to help them—it’s the reason behind our industry’s emphasis on financial wellness, on budgeting, and on people trying to live within their means.
We also see bad behavior in action. For example, look at some numbers we recently got from Fidelity. That firm examined loans and hardship withdrawals taken after the Bipartisan Budget Act of 2018 eased borrowing rules. Participants no longer have to be forced to take a loan before taking a hardship withdrawal from the retirement plan, which many industry experts prophesized would increase the number of withdrawals.
It appears that prediction came true. Across Fidelity’s book of plans, the number of hardship withdrawals taken in the first months of this year jumped 40% over 2018. And it doesn’t appear to just be those who would have taken a loan moving straight to hardship withdrawals, as the rate of retirement plan participants taking loans fell only 7%. When you consider that survey after survey shows most Americans don’t have the cash on hand to meet a financial hardship of $400, it’s clear why so many of these hardship withdrawals may seem like the only option.
Advisers such as you are in a position to help these folks, but it takes work, as we all know. So many of the big-picture savings needs that lead to the regrets seen in the Bankrate survey are hampered when people live paycheck to paycheck or don’t have any emergency savings. The need for a new fridge or a large medical expense can mean taxes and withdrawal penalties, not to mention the lack of money compounding and growing in a savings account.
When we as an industry see people potentially harming themselves financially, I think we have to step in and educate them. We are starting to hear rumblings about, and see plan sponsors putting into practice, sidecar savings accounts, or emergency savings as a supplemental payroll deferral option.
There is interest in such a program. The “Saving at Work for a Rainy Day” report from the AARP Public Policy Institute last year indicated that seven in 10 employees would likely participate in an employer-based rainy-day savings program, similar to a sidecar savings option. The option was explained to survey respondents as an employee-specified amount of money to be deducted from each paycheck and deposited into a special savings account. The employee is free to take the money out of the savings account at any time without paying a penalty and there are no fees to save in the account.
Are you comfortable talking with your plan sponsor clients about those options and participant needs? Are employees being communicated to about the importance of saving a little bit here and there to get that cushion? It’s a simple idea that needs more support for it to become widespread but could make a big difference to those who have access to one of these savings accounts. We’ve seen plan sponsors have participants split their deferrals between a sidecar account and the defined contribution (DC) plan until they hit some sort of savings target, then move all future money into the DC plan. That’s just one idea; I know we have lots of creative folks in the industry to facilitate more solutions.
Big Bird from “Sesame Street” has taught my kids that everyone makes mistakes—and they do. But the mistakes my kids make aren’t going to cost them years of spending in retirement. The mistakes your plan sponsor clients’ participants make just might.