8.8%: Drop in probability of low-income workers reaching 80% income replacement in retirement if they take money from their defined contribution plan early.

So-called “leakage,” when plan participants take money out of their 401(k) or other DC account before retirement, can seriously hobble their efforts at saving, according to the Employee Benefit Research Institute. By the time workers with at least 30 years’ eligibility for a 401(k) plan reach age 65, those in the lowest-income quartile may reduce their probability of reaching an 80% real replacement rate for their income by 8.8 percentage points. Meanwhile, their counterparts in the highest-income quartile may lose 7 percentage points. Leakage takes three forms: loans, hardship withdrawals and payouts when participants change jobs.

Plan sponsors and their advisors have many ways to help participants in all income brackets save for retirement. But perhaps the most basic is simply helping them understand the importance of paying their own retirement accounts back. Consider teaching participants about the problems loans can bring—less growth in their retirement account plus potential tax hits if not paid back properly—is key*. Plan sponsors can also explore plan changes, including possible restrictions on loans.

Source:

Related Resource:

* BlackRock is not engaged in rendering any legal, tax or accounting advice.

Browse: DC Daily Stat

Previous

Women Worried About Running Out

Jul 25, 2014

Next

What Are My Options?

Jul 29, 2014

This material is provided for educational purposes only and is not intended to constitute “investment advice” or an investment recommendation within the meaning of federal, state, or local law. You are solely responsible for evaluating and acting upon the education and information contained in this material. BlackRock will not be liable for any direct or incidental loss resulting from applying any of the information obtained from these materials or from any other source mentioned. BlackRock does not render any legal, tax or accounting advice and the education and information contained in this material should not be construed as such. Please consult with a qualified professional for these types of advice.