The enemies of retirement savings

Una Morabito

By Una Morabito
Una Morabito is Head of Client Management for the Workplace Solutions unit of MassMutual.
Posted on Sep 4, 2019

Sometimes, we can be our own worst enemies.

It can be particularly true when it comes to saving for retirement due to certain behaviors that can reduce retirement savings and impair the ability of employees to retire sooner rather than later. We’re talking about employees dipping into retirement savings early, suspending contributions to 401(k) plans, or both.

The culprits are generally 401(k) loans or hardship withdrawals, suspended salary deferrals, or opting out of behavioral finance initiatives such as automatic enrollment or automatic deferral. Such behaviors may push back retirements by years, necessitating that workers stay on the job long after the traditional retirement age of 65.

Analysis by MassMutual’s Viability Advisory Group, which measures the impact of employee benefits utilization, shows that such behaviors reduce workers’ retirement savings on average by 14 percent, delaying retirements and costing employers more for salaries and benefits as their workforce ages. 1 For example, a typical 40-year-old worker who is currently on target to retire at age 65 but then borrows 30 percent of his 401(k) savings could potentially reduce his available retirement income by 15 percent and delay his retirement by five years, according to Viability.

The impact of retirement-savings-robbing activities is especially hard on younger workers. Younger workers are most likely to participate in as well as suffer the most from siphoning savings.

For instance, a 29-year-old employee who is on target to retire at age 65 but then takes a hardship withdrawal reduces his or her retirement-readiness by 20 percent on average, according to MassMutual’s data. Meanwhile, a 60-year-old employee who is on target to retire and withdraws the same amount typically reduces his or her retirement readiness by 3 percent on average. The loss of retirement readiness reflects the value of lost interest earnings on the withdrawal before retirement, taxes, and penalties.

Interruptions to retirement savings can be costly for both employees and employers. A reduction in retirement readiness may require an employee to continue working past age 65. That typically increases an employer’s costs for salaries, and health and disability insurance benefits as workers remain in the workforce at older ages.

MassMutual, through Viability, provides tools and analysis to help employers and their financial advisors evaluate the potential costs and liabilities associated with the under-utilization of retirement savings plans, specifically if employees lack sufficient savings to replace 75 percent of their pre-retirement income at age 65. The analysis also helps employers measure the inherent value of 401(k)s and other defined contribution retirement plans when they are utilized to their fullest.

Additionally, Viability can be used to help calculate employers’ potential liabilities associated with the aforementioned behaviors that interrupt retirement savings. Those liabilities can vary significantly between employers depending upon a host of variables associated with the makeup of the workforce, the design of the retirement plan, savings habits, available employee benefits, and other factors.

MassMutual’s tools can help calculate the potential impact of activities that impair retirement readiness by using an employer’s own salary, benefits and retirement savings data. The underlying assumptions for specific behaviors are based on a benchmark created with data from the National Bureau of Economic Research ,2 the Employee Benefits Research Institute ,3 American Benefits Council ,4 the United States Department of Labor ,5 and MassMutual’s own experience with retirement plans.

If an employer analyzes its retirement plan’s effectiveness, the resulting information can help the company better manage its retirement plan going forward. For instance, if the analysis shows that the overall effectiveness of a 401(k) is suffering from employees making early withdrawals, taking loans, suspending salary deferrals or opting out of behavioral finance programs, there are some potential steps that the employer may take, individually or as part of a broader strategy. Of course, the employer should consult it’s legal, tax and investment advisors before moving ahead with steps such as:

  • Deciding whether to allow or limit the ability of employees to take loans or withdrawals from their retirement savings;
  • Ensuring retirement savings incentives such as matching contributions are used as intended, to help workers better prepare for retirement;
  • Educating workers about the negative effects of loans, withdrawals and deferral suspensions on their ability to retire and encourage them to avoid such behaviors;
  • Providing programs that educate workers about financial issues such as budgeting, debt management, retirement planning and related topics; and
  • Educating employees about appropriate investment choices and asset allocations based on their retirement goals and time horizon as well as their risk tolerance to help employees more effectively accumulate and protect savings over the long term.

The goal for MassMutual’s data capabilities is to help employers and potentially employees make better, more informed decisions about how to manage their retirement savings plans. There are retirement plan designs and related initiatives that promote behaviors that encourage rather than discourage savings.

The objective is to help ensure we make better choices and ultimately avoid becoming our own worst enemies.



1 MassMutual Projects the Impact of Behaviors that Delay Retirement for 401(k) Savers,Viability Advisory Group, 2017.

2 National Bureau of Economic Research, “Hardship Withdrawals from 401(k) Savings, Borrowing from the Future: 401(k) Plan Loans and Loan Defaults,” April 2015.

3 Employee Benefits Research Institute, “401k Loan Activity,” April 2016.

4 American Benefits Council, “Trends in 401(k) Plans,” March 2013.

5 Department of Labor, “Patterns of Marriage and Divorce,” October 2013.

The information provided herein is not written or intended as specific tax, investment or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.