Solving the Retirement Savings Riddle

The headlines:

• EBRI reports the average 401(k) account balance was $63,929 at the end of 2012; the median was $17,630. Even factoring in higher balances based on age, tenure, and salary, many individuals will not have sufficient savings for a secure retirement.
• EBRI finds only 18% are "very confident" of having a financially secure retirement; what's more, 58% of workers and 44% of retirees are facing debt challenges (EBRI)
• A Wharton School study found that 90% of 401(k) plans force a distribution when a participant leaves employment, with an extraordinarily high percentage of workers defaulting on repaying the loan, resulting in plan leakage. Benefits attorney Bob Toth's very thought-provoking blog entry noted, "[T]his traditional plan design imposes a severe financial hardship upon those who involuntarily lose their jobs, at a time when they can least afford it."

I will leave it to those with expertise in plan and product design to create great solutions, but my personal experience set me to thinking about what can be done differently to encourage retirement savings AND solve CURRENT financial challenges. One idea that came to mind was what if instead of penalizing people who are undergoing a major financial challenge, we made it easier for them to get back on their feet AND helped everyone save more for retirement at the same time? For those who are laid off, the focus is on the immediate future. What if we came up with a way to allow individuals to have an emergency fund that would cover the period of financial stress, but via greater contributions to a 401(k) plan? Instead of imposing penalties for early withdrawal, what if individuals could repay it AFTER they returned to employment? Instead of imposing on taxpayers for assistance, many of whom already feel financially stretched, you would access your own funds.  

The 10% early withdrawal penalty was designed to discourage access to retirement funds before what one usually thinks are the retirement years. If it were too easy, then retirement savings would not be there during those retirement years. For many of those who are accessing retirement funds, however, it is more a matter of necessity than of choice. The attached visual piece is an attempt to outline the problem and suggest a solution. It is meant as a starting point, open to fine tuning along the way. If we think of retirement as part of the overall financial picture, and not simply an isolated moment, then I think we can finally generate a more realistic solution. Telling people they need a million dollars for a secure retirement is counterproductive. Helping people solve their own financial riddles will produce positive results.