Ouch! For most workers, early withdrawals from retirement accounts turn out to be very costly, since lost opportunity from market gains is hard to make up. Encourage plan participants to do everything they can to safeguard their hard-won retirement savings.
The Cost of Lost Opportunity
Experts caution that when workers withdraw funds from 401(k) plans, they are likely “costing themselves” another 5 to 10 years in the workforce. As a financial planner recently explained for CBS News:
If you took out $100,000 from your account during the end of March this year, you would have missed the 66.88% gain in the broad stock market….That’s a loss of opportunity of $66,880 that you never get back.
Normally, those under 59 1/2 who take money from their 401(K) accounts would incur a 10% penalty from the IRS—and the funds withdrawn would be added to end of year tax bills. Although COVID relief measures have waived the penalty, it’s best for employees who have to dip into retirement savings to do so in the form of a loan. As experts suggest:
The borrow option forces someone to pay back the money over three years and get some chance at restoring the pre-pandemic balance….
Raise Awareness—and Add Protection
As a retirement plan sponsor, always make sure your plan participants have the information they need to make the best decisions they can about their funds. Many retirement plan service vendors offer online tools, workshops and advising services—so make sure your plan participants know how to access information your vendors provide. In the meantime, be sure you are doing everything you can to protect the retirement plan—and yourself as a fiduciary.
A fundamental aspect of protecting your retirement plan is securing the ERISA Fidelity Bond required by the federal government—and making sure that it is current and covers the plan at all times. For assistance with this, and more, let Colonial Surety Company, a national leader in the field, help. Just select an affordable coverage package and receive a full-service solution that includes:
- The ERISA bond required to protect the assets of the retirement plan from theft;
- Cyber Liability coverage to safeguard your company and plan from covered losses and expenses in the event of a cyber breach; and,
- Fiduciary Liability coverage to protect you and your assets from personal liability.
Colonial Surety Company provides user-friendly, digital and direct service. You can easily and quickly purchase your bonds and related insurance coverage online—and instantly print or e-file them from your desktop—or anywhere.
Trends to Understand: Why Employees Tap Retirement Funds 2020 findings from the annual survey of the Transamerica Center for Retirement Studies point to the critical importance of employer-sponsored benefit plans. For example:
As a result of the pandemic, 33 percent of all workers have already and/or plan to take a loan and/or withdraw from their qualified retirement accounts such as a 401(k), 403(b), or similar plan or IRA.
Among workers who have taken out a loan from their 401(k) or similar plan, the most frequently cited reason is to pay off credit cards and/or other debt (38 percent). Financial emergencies (29 percent) and medical bills (22 percent) are also cited as reasons to take out loans.
Among workers who have taken a hardship withdrawal from a 401(k) or similar plan, 21 percent indicate their primary reason for doing so is to make payments for certain medical expenses. Other commonly cited reasons are to pay for tuition (17 percent) and to cover expenses and losses incurred due to a disaster.
With so much to be concerned about, plan sponsors can easily lose sight of fundamentals for plan protection. Get help from the experts at Colonial Surety Company. Our unique packages even include extended coverage to ensure your ERISA bond remains US Department of Labor compliant—and retroactive coverage for past years if the plan was not adequately covered.
Keep in mind, the ERISA bond required for the retirement plan protects the participants of the plan, but does not cover you—the plan sponsor— as the fiduciary.
Uniquely, Colonial’s ERISA bond packages offer plan sponsors up to $1,000,000 of fiduciary liability insurance.
Colonial’s 2 or 3-year ERISA bond packages provide the greatest overall savings and protection. In addition to fiduciary liability coverage, you can add cyber liability insurance to safeguard your company and plan from covered losses and expenses in the event of a cyber attack.
Colonial Surety Company is in business all across the USA. We are rated “A Excellent” by A.M. Best Company and U.S. Treasury listed.