Practice Management

Behaviors That Hurt Retirement Savings

By Tom Foster

Sneaking an extra cookie (or two) when no one is watching. Drinking another glass of wine because you’re not driving. Or watching that second football game on TV instead of working out.

There are many temptations to break from disciplined health routines that can sometimes push us off track from our goals, especially during the holidays. It can be like that for retirement savings as well.

Savers in 401(k)s and other retirement plans sometimes indulge in behaviors that can hurt  or deplete their retirement savings, impairing their retirement readiness by an average of 14 percent, according to MassMutual’s analysis of employers that sponsor its retirement plans. These impairments can push retirement dates back by months, years and even decades.

What are these “bad behaviors” that interrupt retirement savings? Are 401(k) savers treating their retirement plans like cookie jars or becoming intoxicated with the availability of ready cash to meet short-term needs? Well, sometimes.

The behaviors MassMutual is measuring include taking loans or hardship withdrawals, suspending salary deferrals, or opting out of behavioral finance initiatives such as automatic enrollment or automatic deferral. Each of these behaviors may have a detrimental impact on retirement savings and should be avoided whenever possible.

Admittedly, some people may have few other resources other than their retirement savings when faced with a financial emergency.  It’s why many employers allow loans and withdrawals from their 401(k) plans and may be reluctant to further restrict their availability. But there’s a real and measurable cost to both employers and employees as retirements may be delayed and dreams unfulfilled.

For example, a typical 40-year-old worker who is currently on target to retire at age 65 but then borrows 30 percent of the savings in his 401(k) could potentially reduce his retirement readiness by 15 percent and delay his retirement by five years, MassMutual calculates. That decision typically increases an employer’s costs for salaries, health and disability insurance as workers remain in the workforce at older ages.

The impact of behaviors that negatively affect retirement readiness varies with age, MassMutual’s data shows, with younger employees most likely to participate in as well as suffer the most from such activities. A 29-year-old employee who is on target to retire at age 65 but then takes a hardship withdrawal reduces his or her retirement-readiness by 30 percent on average, according to MassMutual’s analysis.  Meanwhile, a 60-year-old employee who is on target to retire and withdraws the same amount typically reduces his or her retirement readiness by 3 percent on average.

The loss of retirement readiness reflects the value of lost interest earnings on the withdrawal before retirement, taxes and penalties, as well as a six-month suspension in salary deferrals, which typically happens when retirement plan participants withdraw savings. The underlying assumptions for specific behaviors have been calculated by MassMutual from data from the National Bureau of Economic Research1, the Employee Benefits Research Institute2, American Benefits Institute3 and the United States Department of Labor4.

Financial advisors who support retirement plans can help.  No, advisors don’t have to slap a client’s hand as he or she reaches for the cookie jar. No one is going to get a lecture about financial discipline.

Instead, advisors can work with employers to better manage their retirement plans and update their plan documents to either forbid or limit behaviors that can damage retirement savings. When reviewing a retirement plan with an employer, advisors should work with their plan provider to scrutinize the effect of withdrawals, loans and suspensions on savings. Then, advisors can have a heart-to-heart with the employer about taking concrete steps to protect savings such as:

  • Deciding whether to allow or limit the ability of employees to take loans or withdrawals from their retirement savings;
  • Ensuring retirement savings incentives such as matching contributions are used as intended, to help workers better prepare for retirement;
  • Educating workers about the negative effects of loans, withdrawals and deferral suspensions on their ability to retire and encourage them to avoid such behaviors;
  • Providing programs that educate workers about financial issues such as budgeting, debt management, retirement planning and related topics; and
  • Educating employees about appropriate investment choices and asset allocations based on their retirement goals and time horizon to help employees more effectively accumulate and protect savings over the long term.

There are many temptations that can lure retirement savers to get off track in meeting their goals. Fortunately, advisors have several tools to help discourage “bad behaviors” and help keep retirement savers on track. As part of your next plan review with plan sponsors, discuss the potential to incorporate plan features that may help discourage loans, withdrawals and other behaviors that can derail savers from their goals and encourage the sponsorship of educational sessions about budgeting and managing emergency expenses.

E. Thomas Foster Jr. is head of strategic relationships for retirement plans for Massachusetts Mutual Life Insurance Co. (MassMutual).


National Bureau of Economic Research, Hardship Withdrawals from 401(k) Savings, Borrowing from the Future: 401(k) Plan Loans and Loan Defaults,

Employee Benefits Research Institute, 401k Loan Activity,

American Benefits Institute, Trends in 401(k) Plans,

Department of Labor, Patterns of Marriage and Divorce,