Do tax incentives really influence behavior?

It’s a question now being asked in the wake of a new report that found in 2010, loans, early withdrawals and penalties all added up to $70 billion taken from 401(k)s prior to retirement age. By comparison, employees contributed $175 billion to their 401(k) accounts that same year.

The report, released by technology provider HelloWallet, analyzed consumer finance data from the Federal Reserve and the U.S. Census Bureau. The survey adds that the results also hold “significant implications for employers, who collectively invest $118 billion annually in 401(k) programs for their workers’ retirement.”

One out of four participants in 401(k) retirement programs will either cash out their savings before retirement—incurring substantial penalties and taxes—or forfeit them to loans.

Among the other findings in the research:

 •26% of 401(k) participants now use their 401(k) savings for nonretirement needs;

 •75% of those who made withdwawals report that they breached their savings because of basic money management problems;

 •Workers now withdraw or breach more than $70 billion annually out of their 401(k)s for nonretirement needs;

 •Penalized withdrawals increased from $36 billion to about $60 billion between 2004 and 2010;

 •Workers in their 40s are most likely to breach their savings for nonretirement needs.

“This research shows that employers are not getting the ROI that they may think they are from their retirement investments,” HelloWallet founder and CEO Matt Fellowes said in a statement. “Investing in retirement savings is essential for all Americans, but this study demonstrates that a large share of U.S. workers lack the basic financial skills needed to actually benefit from those savings, and it’s costing both them and their employer dearly.”

The research also finds that only a small percentage of employees (8%) are withdrawing funds because they have lost their jobs. Instead, 75% of those who have made early withdrawals have done so because they lack basic money management skills and need to meet basic money management challenges, such as emergencies, credit card payments and health care. In many cases, better planning and guidance would put them on a track to avoid costly mistakes, take advantage of the tax incentives and accumulate the savings needed for retirement.

American companies now spend the aforementioned $118 billion annually on retirement contributions with the expectation that employees will take maximum advantage of these programs to improve their financial well-being. The new research suggests that employers’ massive investment is not always delivering the intended results.