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Dressing 401(k) wounds

By Crissinda Ponder · Bankrate.com
Saturday, February 23, 2013
Posted: 6 am ET

Times are hard, finances are tight, and 401(k)s are bleeding.

More than 25 percent of U.S. households that use 401(k)s or similar defined contribution plans for retirement have dipped into their balances for nonretirement spending, amounting to more than $70 billion in annual withdrawals, according to a recent study by financial advisory firm HelloWallet.

Employees save $175 billion in defined contribution plans every year, and employers match those contributions to the tune of $118 billion. However, defined contribution plans comprise a mere 7 percent of the gross asset value owned by households approaching retirement.

Here's a shocker: Of the $70 billion in annual withdrawals from retirement accounts, $60 billion is withdrawn for nonretirement purposes and smacked with a tax penalty from the Internal Revenue Service. The other $10 billion is for loan originations.

How can employees solve the financial crises of right now without depleting the funds they will need in the future?

Ladies and gents, it's time to break out the bandages.

Since 27 percent of workers with unmet, basic financial needs breach their retirement accounts, meeting those needs first and putting retirement savings on the back burner may be a more sustainable solution.

According to HelloWallet, a growing number of defined contribution plan participants are receiving investment advice that is misaligned with their needs, drives up the cost of their savings and increases the likelihood of a tax penalty.

To stop a bleeding 401(k), employees should consider building emergency savings and establishing a strict budget that addresses basic financial needs. Additionally, if the money isn't being used for retirement purposes anyway, it may be time to either cut down the contribution amount or put contributions on hold. While retirement planning is important and everyone should contribute up to the company match in a workplace plan, you may be sabotaging your savings effort if you don't address your basic needs first.

In what ways have you used your defined contribution plan as a crutch for nonretirement needs? How did you manage to put a bandage on your bleeding 401(k)? Tell us below.

Follow me on Twitter @CrissiPonder.

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