Help ‘Displaced’ Workers Safeguard Their Nest Eggs

Account withdrawals jeopardize retirements of workers laid off or working fewer hours

By Stephen Miller, CEBS Aug 9, 2013

Fifty-nine percent of unemployed or underemployed (or “displaced”) American workers report having a retirement savings account. But despite people’s widespread familiarity with the taxes and potential penalties that may apply if they withdraw money before retirement, more than one-third (36 percent) of displaced workers are in such a financial predicament that they have taken a withdrawal from their retirement accounts, according to a study by the Transamerica Center for Retirement Studies (TCRS), a nonprofit affiliated with benefits provider Transamerica Retirement Services.

The findings are included in a recent TCRS report,Repairing the Damaged Nest Egg: How to Improve the Retirement Outlook of the Unemployed & Underemployed, based on results from the 14th Annual Transamerica Retirement Survey (2013).

“The passage of time out of work, especially the one-year mark, can have a detrimental effect on retirement accounts,” TCRS President Catherine Collinson told SHRM Online. She noted that of those who participated in a 401(k) plan at the most recent company where they worked full time, 43 percent indicated they have withdrawn funds from their accounts, including 53 percent of the unemployed and 38 percent of the underemployed.

“During the economic downturn, many displaced workers have depleted their retirement accounts in order to pay for basic living expenses while they seek meaningful employment. It’s important that employers take the opportunity to help this group rebuild their long-term financial futures,” Collinson said.

Savings Targeted
Among all displaced workers, the estimated median household savings in retirement accounts is approximately $7,500. The estimated median savings by age range are shown below.

Age Range

Total Household Savings in Retirement Accounts (Estimated Median)

20s and 30s








Source: 14th Annual Transamerica Retirement Survey (2013)

Displaced workers in their 40s—the age range that reports the lowest level of household retirement savings—had the highest level of retirement account withdrawal activity (55 percent), which helps explain the savings differential. People in this age range are also likely to be paying for children in college.

Action Steps for Employers

Collinson advises employers (along with their retirement plan advisors and providers) and government policymakers to consider taking steps to help displaced workers maintain their savings. Employers, in particular, could provide financial counseling and transition assistance to workers who are laid off, as a way to educate them on how to avoid taking early withdrawals from retirement accounts. For instance, employees should be advised to:

  • Budget carefully. Identify ways to reduce or share the burden of living expenses. Move to a home that offers a lower mortgage or rent, or consider temporarily moving in with family.

  • Look for new opportunities as early as possible, even if it means underemployment, to avoid the negative effects of time out of work.

  • Get a part-time job to help cover expenses while seeking full-time employment, which may alleviate the need to take on debt or pull from savings. Although it may not be the ideal career path, it will help bridge the gap between unemployment and full-time employment.

  • Seek opportunities to update and improve professional skills to match the needs of potential employers. Look for free or affordable classes and training at local educational centers or community colleges. Pursue a practical area of interest that can help expand on-the-job skills.

  • Consider retirement benefits packages along with salary when evaluating job opportunities.

  • “Stay positive and focused,” Collinson said. “Improving job prospects when possible and earning part-time income are crucial to reducing dependence on retirement funds to cover expenses.”

Other actions employers could take include offering competitive retirement benefits and encouraging plan participation by adopting automatic enrollment and automatic escalation to help workers rebuild their savings as soon as possible.

“Employers, along with retirement plan advisors and providers, can help employees who are being laid off by providing counseling and transition assistance on ways to avoid taking early withdrawals from retirement accounts," Collinson explained. "This can include educating them on the risks of and consequences for taking loans from these accounts, and discouraging them from doing so. With this knowledge, plan participants can make informed decisions about their accounts while they seek reemployment.”

“Employers should also continue to offer competitive retirement benefits and encourage participation through automatic enrollment and escalation features," Collinson added. "By making plans as simple and efficient as possible, employers can help people rejoining the workforce begin saving again immediately.”

“Finally, something employers can do for all employees is to promote awareness of tax incentives for retirement savings, including the Saver’s Credit, which is a tax credit available to low- to moderate-income individuals who contribute to qualified retirement savings plans,” she noted.

Recommendations for Policymakers

Public policymakers should consider extending the 401(k) loan repayment period for terminated plan participants and exploring incentives for individuals not to withdraw retirement funds while unemployed or underemployed. In addition, Collinson would like to see them pursue legislative and regulatory initiatives to increase retirement plan coverage for workers, including part-timers, by:

  • Expanding the tax credit for employers to start a plan.

  • Implementing reforms that remove restrictions against multiple employer plans (MEPs).

  • Adding nondiscrimination testing safe harbors for 401(k) and similar defined contribution plans.

  • Implementing reforms to automatic features to increase employer adoption rates as well as plan participation and contribution rates.

“From a public-policy perspective, our current retirement system is largely predicated on the assumption that workers have access to meaningful employment so that they can self-fund a substantial portion of their retirement,” said Collinson. “If displaced workers fail to overcome retirement savings setbacks due to unemployment or underemployment, society may ultimately bear the cost when future generations of senior citizens run out of savings.”

Many Must Retire Earlier than Planned

Many employees are compelled to stop working years before than they had expected, reducing the time they have to save for retirement, according to LIMRA Retirement Research survey.

For nearly half (49 percent) of U.S. retirees, the date of their retirement was controlled by factors outside their control such as health issues (17 percent), job loss due to layoff or an employer buyout (14 percent) and negative work conditions (7 percent).

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related SHRM Articles:

More 401(k) Loan Taking by ‘Sandwiched’ Employees, SHRM Online Benefits, April 2013

Preretirement 401(k) Breaches on the Rise, SHRM Online Benefits, January 2013

Loans: A Delicate Balancing Act, HR Magazine, January 2013

Senate Bill Would Limit Retirement Savings ‘Leakage,’ SHRM Online Benefits, May 2011

Quick Links:

SHRM Online Benefits page

SHRM Online Retirement Plans Resource Page

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