The Wall Street Journal reports today that hardship withdrawals from 401(k) accounts are rising and that investors are showing other signs of pulling back from the market amidst the current turmoil. According to WSJ, the signs include cutbacks in contributions to retirement accounts, shifts away from stocks toward fixed income vehicles and outright hardship withdrawals–despite the 10 percent penalties these withdrawals incur.

There’s no solid data available yet on withdrawals over the past week. But David Wray, president of the Profit Sharing/401(k) Council of America, tells me that while hardship withdrawals are up year-to-date, the overall numbers remain below 2 percent of all investors–an “extremely low” number. “There’s no evidence of people making significant reductions in their contributions to plans,” Wray says.

“People are concerned but the typical experience we’ve seen with 401k accounts is that people stay the course. We’ve been through this before in 2000 to 2002, which was considerably worse due to 9/11 and other financial troubles. At that time the 401(k) system remained stable. It’s an island of stability in a sea of uncertainty.”

According to Fidelity Investments–which has one of the industry’s largest databases of investor statistics–the percentage of workers with a balance in their workplace savings plan taking a hardship withdrawal for an immediate or severe financial need was up slightly to 0.60 percent in the three months ended June 30, 2008, as compared to 0.56 percent in the same period in 2007.

Fidelity said that the numbers for people initiating a loan from their workplace savings plan during the three months ended June 2008 was 2.8 percent, down from 3.1 percent at the end of June 2007.

With the harrowing news out of Wall Street the past couple weeks, I have no doubt stress is mounting among retirement investors. But hardship withdrawals are related more directly to dire personal household finance situations resulting from joblessness, home foreclosure and the like–not market turmoil. If the economy retreats even further as the year progresses, we’ll probably see hardship withdrawals jump further.

I outlined the reasons for avoiding hardship withdrawals if you possibly can at RetirementRevised in May.

This entry was posted on Tuesday, September 23rd, 2008 at 1:20 pm and is filed under Financial Markets, Financial Services, Retirement Security, pensions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.