Information from a study released on Monday revealed that Blacks are more likely to dip into their 401k plans before they actually retire. The withdrawals were based on hardship situations according to Aon Hewitt, the human resources division of Aon Corp., and Ariel Education Initiative, a nonprofit affiliate of Chicago-based Ariel Investments, LLC.
Even though the recession was officially over in 2010, and despite stiff tax consequences and penalties for withdrawing money before age 59½, nearly one out of 10 — or 8.8 percent — of Blacks still borrowed against their plans. Whereas in comparison, 3.2 percent of Latinos, 1.7 percent of whites and 1.2 percent of Asian-Americans made such withdrawals. Statistics for 2007 were also more than twice as high for African-Americans, according to an Ariel Investments press release.
The study examined 60 defined contribution plans representing 2.4 million employees.
Mellody Hobson, president of Ariel Investments shared his thoughts on the trend:
The Great Recession caused many employees to tap into their 401(k) plan. This has been especially true of African-American and Hispanic workers who have been hit the hardest by the recession. Since 401(k) plans have become the primary way Americans save for their golden years, this study dramatically shows how much is at stake.”
Cashing out before time puts retirement savings at a great risk. Investing behaviors amongst Blacks has to improve or the study eludes to the fact that they could face those golden years in poverty.
Hobson advises that borrowing from your 401k retirement may not have to result in financial insecurity if you pay yourself back. Still, she cautions that we must also be prepared for unforeseen circumstances:
But unfortunately,” she says, “the best of intentions get undone when you go through a financial crisis. Most employees who cash out their savings will never be able to rebuild their balance,” Hobson laments.