Early Retirement Plan Withdrawals: How to Help

Early Retirement Plan Withdrawals: How to Help

| April 01, 2023

Albert Einstein may not be remembered as a finance expert, but he seems to have had a bead on the power of smart investing. When asked what mankind’s greatest invention was, he’s reputed to have answered “compound interest,” describing it as the “eighth wonder of the world.” Compounding may indeed be one of the most potent forces in the universe, but there’s one noteworthy caveat — to leverage its awesome power, investors need to stay in the game.

According to a Bankrate survey, many are failing to do just that — more than half of those polled reported they took an early withdrawal from their retirement account. Gen Zers were the most likely to tap into their 401(k), with 40% saying they did so during March 2020 or after; another 18% took a withdrawal pre-pandemic. Baby Boomers were the least likely to touch their accounts during COVID-19, with just 6% indicating they did so during or after March 2020.

When account holders keep money on the sidelines by taking early withdrawals, retirement goals can become elusive — or even impossible to achieve. So how do you convince participants to hold their ground? A strategy that employs a holistic financial wellness offering, optimized messaging and facilitated rollovers can go a long way toward preventing premature cash-outs.

Offer Comprehensive Support

In a study conducted by Kiplinger, nearly one-third of respondents ages 40 to 74 said they took money from their retirement accounts in 2020 due to the CARES Act; another 27% took loans. The withdrawn funds were used mostly for living expenses (63%), but other reasons included covering medical expenses, home repairs, and auto costs; paying college tuition and helping family members.

Regardless of the need or circumstances, participants should be educated about the consequences associated with early retirement plan withdrawals and develop strategies to avoid them. To that end, a holistic financial wellness offering should include broad-based education around debt and credit management, emergency funds, budgeting, and goal setting. Prudent planning can help employees reduce the need to tap into their nest egg and help keep them on the path toward retirement readiness.

Tailor Participant Messaging

Communications in a multigenerational workplace can be more effective when delivered in formats targeted to each age cohort. For example, messaging aimed at Gen Zers could be provided through channels they're more likely to engage with — like videos and social media. For Gen X and millennials, email communications and online resources, respectively, may be more effective, while Baby Boomers may prefer written or face-to-face communications.

Reduce Fund Transfer Friction

Set up your plan to accept roll-in contributions and do what you can to facilitate them. The easier sponsors make it for employees to transfer funds, the more likely they’ll participate consistently over time. Discourage plan leakage by engaging a service provider to offer guidance, education, and support to both newly hired and terminated employees.

Better for Everyone

Helping employees stay on target with their retirement goals by minimizing early withdrawals is a win not only for employees but for sponsors and the organization as a whole. Because happier, healthier, more productive, and more financially secure employees boost everyone’s bottom line in the end.

How Stonebridge Can Help

It can be a bit overwhelming to administer a company retirement plan, given all the documentation nuances let alone the deadlines! At Stonebridge Financial Group, we work exclusively with retirement plans and can help you with everything from designing to running your plan. Delegating fiduciary responsibilities can be a great solution for plan sponsors who lack time and the knowledge of ever-changing requirements to manage a retirement plan -- it's is all we've done since our inception back in 2004! Our robust service offering starts with ERISA 3(21) and 3(38) services and is the tip of the iceberg. We are consultants that help you with every aspect of your plan:

  • Implementing cybersecurity best practices 
  • Plan design including student debt benefits
  • Complete IRS and CPA audit support - we have ex-auditors on staff!
  • Participant 1:1 and group education
  • Fee benchmarking
  • Ensuring participant retirement readiness
  • Consulting on financial wellness
  • Committee fiduciary training
  • Process creation and documentation
  • Plan design
  • Contribution match modeling
  • Annual plan compliance review

We become your outsourced retirement plan officer who dives into the morass of retirement plan details and resolves issues so you don't have to!

Please click here to schedule a short call, give us a call at (855) 530-0500 x601 or email info@stonebridgefinancialgroup.com. We look forward to helping your committee successfully fulfill their fiduciary duties with ease and excellence!