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The “Elephant” In the Retirement Savings Room


Too many plan advisors, service providers, policy makers, academics and pundits are hyper focused on saving for retirement – which may actually impede rank and file workers’ preparation for retirement.

Many believe rank and file American workers must focus solely or primarily on saving in their 401(k) or 403(b) if they are to successfully prepare for retirement. Many advisors and service providers have recommended restricting access to monies once contributed to a plan. Even more advisors and service providers are working on communication/marketing initiatives designed to discourage use of plan loans.1

Test Yourself
Take this selective attention test. Carefully focus on the people passing the basketball. Count the number of times individuals dressed in white pass the ball to others dressed in white.

Did you miss the “elephant” in the room?2

Hyper Focus on Retirement Preparation
A hyper focus on retirement preparation may be best for those workers with adequate disposable income who have retirement as a financial priority. However, it may be counterproductive for those with significant debt and/or those who live paycheck-to-paycheck.

Where liquidity is restricted, workers may respond by contributing only that which is not already pledged to cover accumulated debt or that’s not needed for current spending. Or, workers may restrict savings to those monies they believe they can afford to earmark for a distant retirement. This may be counterproductive, depressing savings.

Keep in mind that a super majority of workers who live paycheck-to-paycheck also save in their employer-sponsored retirement savings plan.3 For many, retirement savings may be their only cash equivalent investment.4 Just as important, more than one in five workers are unbanked or underbanked and they use an “alternative financial service product.”5 Likely, these are the same workers who lack a favorable credit score/rating/history – meaning that the plan loan may be their only source of readily available credit/liquidity.6

Your 401(k) or 403(b) plan can provide needed liquidity – addressing financial wellness needs along the way to retirement.

Retirement preparation is likely more adversely affected by leakage – either hardship withdrawals and/or post-separation withdrawals. Plan loans are not leakage if repaid; and most plan loans are repaid. So, reconsider proposals that would limit liquidity via plan loans. Make sure you don’t inadvertently encourage taxable hardship withdrawals or encourage the use of high cost sources of liquidity like payday loans.

1J. Towarnicky, Misleading Plan Sponsors Regarding Plan Loans Hurts Participants, 5/29/19, Accessed 7/31/19 at: See also: Qualified Plan Loans – Evil or Essential? – Part 1, 5/15/18 and Qualified Plan Loans – Evil or Essential? – Part 2, Accessed 7/31/19 at:, and 2C. Chabris, D. Simons, The Invisible Gorilla, Accessed 7/31/19 at:
3Getting Paid in America, American Payroll Association, 2018. Q6: How difficult would it be to meet your current financial obligations if your next paycheck were delayed for a week? A6: 70.4% would have some or significant difficulty. Accessed 7/31/19 at: Prior surveys showed that nearly 90% of survey respondents confirmed that despite living payday to payday, that they were contributing to an employer-sponsored plan.
4Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S. Households in 2018, May 2019. “… When faced with a hypothetical expense of $400, 61 percent of adults in 2018 say they would cover it, using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”). … In 2013, (only) half of adults would have covered such an expense in the same way. …” Accessed 7/31/19 at:
5Note ii, Ibid. “… The vast majority … use transaction services such as purchasing a money order or cashing a check at a place other than a bank … Twenty eight percent borrowed money using an alternative financial service product, including payday loans or, paycheck advances, pawn shop or auto title loans, and tax refund advances.”
6Note ii, Ibid. “… During 2018, more than one-third of adults applied for some type of credit. Of those who applied for credit, 23 percent were denied at least once in the prior year, and 31 percent were either denied or offered less credit than they requested. … Negative perceptions may be an additional barrier to credit. About 1 in 10 adults put off at least one credit application because they thought that their application would be denied. …”