Fewer Credit Opportunities = More Retirement Borrowing

Credit union employees will be well aware that only 50% of loan applications are approved, not including those who self-selected not to apply knowing they did not qualify.

Coupled with the fact that approximately 76% of Americans are living paycheck to paycheck, with no savings for unexpected expenses, people are forced to consider unattractive options such as marketplace lending, predatory lenders, or their 401(k)s to access needed funds. In fact, according to Bloomberg, in 2011, Americans prematurely withdrew $57 billion from their 401(k) accounts.

Established as a tax-advantaged way of saving for retirement to augment Social Security, 401(k)s can seem like an attractive option for access to capital. With employer matches of around 3% to 6% and consistent tax-deferred market growth, it should be a no brainer to contribute. Not contributing means leaving money on the table.

There are two ways to access this capital: Withdraw or borrow. A withdrawal occurs when someone takes money out with no intention or means return it. Borrowing is also allowed, but monies are subject to interest or administrative charges and must be returned in full within two years. Both have considerable costs.

The Real Cost of 401(k) Withdrawals

Withdrawal Risks: Because 401(k)s are set up as pre-tax savings, once money is withdrawn, that amount automatically becomes taxable income, usually 20% upfront, and many times higher depending on an individual's tax bracket. Workers under 59.5 years old are also charged an additional 10% penalty for tapping into their retirement funds early – unless used for select expenses. There is also real and lasting damage to the worker's retirement portfolio. Even if the invested market only maintains a 7% annual growth rate, money nearly quadruples every 20 years.

In summary, a $10,000 withdrawal will cost $3,000, or 30%, in upfront penalties and taxes while also taking away nearly $40,000 from retirement 20 years in the future.

Borrowing Costs: Borrowing may seem like better choice with modest interest rates and administration fees around 5%. However, the cost can be higher if repaying the 'loan' derails employees from simultaneously contributing to their retirement, foregoing their employer match and incurring higher taxes. Not to mention, they are losing possible investment growth while their money is not in the market.

Company Costs: Employers also feel this negative effect of becoming a "Retirement Account ATM." Many human resource departments are not equipped to take on the role of financial counselor, nor are they bank professionals – approving, disbursing, and monitoring repayments. Loss of productivity and employee absenteeism is also a burden associated with financial stress.

Marketplace Solutions

In recent years, marketplace solutions have emerged looking to fill this niche lending need and employers now have the option of seamlessly including some innovative financial products in their benefit packages. Financial wellness partners offer counseling and even credit-blind loans at discounted rates as an alternative to otherwise less favorable options. With the right program, an at-risk employee will get the help he or she needs that steers them in the right direction to increase savings, improve credit and take steps towards becoming eligible for traditional financing.

Implementing these HR lending services can lead to increased financial confidence within the workforce. By addressing and alleviating employee's financial hardships, employers can increase productivity, bringing a positive impact to the business' bottom line.

Employer-backed financial solutions are on the rise and paving the way for positive change, ensuring American workers have access to better ways to save and much needed capital, contributing to a more confident, focused workforce.

Adam Potter is co-founder & president of SimpleFi. He can be reached at 650-521-5624 ext. 102 or [email protected]