Rise seen in ‘hardship withdrawals’ — despite the tax penalty.
Economic and stock-market tremors are rattling the nest egg.
With stocks falling, credit tightening and unemployment rising, small investors have been raiding their 401(k) accounts or slashing contributions to the popular retirement plans, according to the latest tallies of plan administrators. Others, eager to shield their portfolios from further damage, are reducing their exposure to stock mutual funds to near record lows.
The behavior — described by some market watchers as panicky in the past week — has led to worries that the retirement prospects are dimming further for Americans, most of whom no longer have private-sector pensions to rely on.
Recent 401(k) winnowing is coming in the form of "hardship withdrawals" — removing cash from the fund, with a 10 percent tax penalty, for exigencies such as job loss, the prospect of losing your home to foreclosure or a big medical expense.
T. Rowe Price Group Inc. in Baltimore saw a 14 percent increase in hardship withdrawals in the first eight months of this year, compared with the same time last year. Boston-based Fidelity Investments says the number of workers with hardship withdrawals rose 7 percent from April through June, compared with the same time period a year earlier. Principal Financial Group Inc., in Des Moines, Iowa, says that requests for hardship withdrawals are up 5 percent this year through Sept. 18, over last year, and that the withdrawal amounts are larger.
All three said they could furnish no withdrawal information about last week, when traffic on their Web sites was up sharply. On Friday, visits to the Fidelity.com Web site were 25 percent higher than the previous high. TIAA-CREF, the big college-retirement fund manager, said calls rose 30 percent over normal last week.
Massachusetts' Secretary of State William Galvin says his office received numerous calls from people who were in a "panic state" and liquidated portions of their 401(k) accounts last week when the market tumbled, not realizing they triggered tax penalties. Mr. Galvin, the state's chief securities regulator, is urging Congress to eliminate the 10 percent penalty on such withdrawals — which comes on top of regular tax rates — for investors who may have acted without knowing the consequences.
Mr. Galvin said relief for individual investors is especially appropriate given the $700 billion bailout fund being proposed to aid financial institutions in the crisis. "If we are providing amnesty to financial services," then "we ought to provide a few breaks to these people."
With the decline of the traditional pension, 401(k)s are the main source of retirement coverage for roughly 60 percent of U.S. workers in the private sector. Currently, about $3 trillion in assets are held in 401(k) plans, according to the Investment Company Institute, the industry group for mutual-fund companies. Many investors are now watching that nest egg shrink, with the Standard & Poor's 500-stock index down 23 percent this year. Headed into the financial crisis, typical retirement accounts were heavily weighted toward stock mutual funds.
At the same time, 401(k) participants fear they won't have the time, or the financial wherewithal, to replenish their accounts. In a change of priorities from a year ago, full-time workers now worry more about "just getting by" — meeting day-to-day expenses — than saving for retirement, according to a survey of nearly 1,000 U.S. employees scheduled for release this month by Transamerica Center for Retirement Studies, a nonprofit corporation funded by Aegon NV's Transamerica Life Insurance Co.
But many investors are up against their credit-card limits or, because of the credit crunch, are no longer able to tap their home equity for that needed cash. Instead, they are increasingly turning to their retirement accounts to stay current.
Taxes on 401(k) contributions and investment gains are typically deferred until the funds are withdrawn after age 59½. The Internal Revenue Service permits hardship withdrawals for critical financial situations, but also for other reasons, such as meeting a child's college tuition or buying a primary residence. Plan sponsors vary in the requirements they place on participants to show such a need, with some requiring documentation.
Because of penalties, financial advisers generally don't recommend the withdrawals. But they acknowledge that some people may have no other good options. Unlike with a loan taken from your 401(k) plan, the money doesn't have to be repaid.
Jill Schlesinger, a Providence, R.I., fee-only registered investment adviser who manages 401(k) plans for clients, says, "If it's the best of the worst options, you should do it. I'd certainly prefer you do that than lose your house or get into some kind of terrible loan situation with your credit-card company." David Wyss, chief economist at S&P, says that with access to education and home-equity loans down, he's hearing about more people "tapping their accounts to pay for their kids' education."
Mr. Galvin says he has asked two Massachusetts Democrats, Rep. Barney Frank, chairman of the House Financial Services Committee, and Rep. Richard Neal, a senior member of the Ways and Means Committee, to look at temporarily relaxing the rules. Representatives for both congressmen said they would look at Mr. Galvin's proposal.
Jim Wharton, a 65-year-old retired Sears Holding Corp. manager in Queen Creek, Ariz., says he moved his entire 401(k) balance of $357,000 to certificates of deposits insured by the Federal Deposit Insurance Corp. recently. The money had been invested in a "stable-value" fund, typically a low-risk, low-yield fund that invests in bonds and interest-bearing contracts backed by insurance companies. He says his next move may be "under the mattress."
According to Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm, the total stock allocation among 401(k) participants is at a five-year low, declining to 62 percent in August from 68 percent a year earlier. Hewitt attributes the decline to an unusually high number of investors transferring money into fixed-income funds. It said it believes the trend continued into September.
Plan administrators are also seeing a wave of employees who are lowering their 401(k) contribution rates — the pretax amounts deducted from paycheck — says Tracy Tucker, spokeswoman for the National Association of Government Defined Contribution Administrators Inc., the Lexington, Ky., organization of plan administrators from local governments. She says some administrators are now "offering presentations on how to survive marketing fluctuations."
Ms. Schlesinger, the Providence investment adviser, says many workers who were too heavy on stock mutual funds going into the crisis have taken hits on their balance and now wonder what to do.
If they are young, she advises them to rotate slowly into more conservative investments — to avoid selling their investments at a low price.
But, she says, if they are five years or less from retirement she is advising them to immediately protect their portfolio from further decline by moving at least 30% or 40% into fixed-income accounts. For many investors, that will mean "taking a loss," she says. She says, "I tell them, 'I'd like to think that the rescue plan is at the bottom of the market, but what if it's isn't? We can't gamble with that.'"