Pinching from the piggy bank

A hearing on “Saving Smartly for Retirement” was held before the Senate Special Committee on Aging. According to Chairman Herbert Kohl (D-Wisc.), the 401(k) saving plan was put into place to ensure Americans have adequate retirement funds but of late, the 401(k) plans are being treated as ‘rainy day funds’ as Americans take out withdrawals and loans.

Christian Weller, Ph. D., senior fellow at the Center for American Progress, discussed the reasons behind 401(k) loans. Weller said that families are taking loans because they are uninsured or under-insured for risks they might face. In addition, he said that families are trying to cope with slow income growth and rising prices for houses, food, energy and health care.

Kohl said that he was against the idea of a 401(k) debit card which allows participants to make everyday purchases using his or her retirement fund. He said it is a ‘gross distortion of the plan’s intended use’ and the high fees associated would ‘drastically diminish savings.’ Ranking member Gordon H. Smith (R-Ore.) pointed out that, according to Vanguard, if an employee takes out two loans of $30,000 total from his 401(k) and pays them back in five years, he will have $40,000 less in his retirement fund after 30 years than an employee who never takes out a loan.
David C. John and Mark Iwry, both principals of the Retirement Security Project, pointed out that aside from withdrawals and loans, leakages were another detriment to retirement plans. In their joint statement, John and Iwry said that the automatic Individual Retirement Account (IRA) approach would feature direct payroll deposits and help households overcome barriers to saving.