Michael Finke,The American College of Financial Services Professor and Director of the Granum Center for Financial Security, joined Yahoo Finance to discuss if defaults limit consumer response to rainy-day funds.
KRISTIN MYERS: Well, let's talk retirement right now. We're joined by Michael Finke-- he's with the American College of Financial Services-- about some pretty interesting research on Target-Date funds. And for folks at home, that's something you typically see in your retirement account. And it's a pretty hands off way of investing. And Michael, I know that you guys found a pretty interesting correlation between folks who are essentially passively investing through their Target-Date funds and drawing on-- or should I say not drawing on-- their retirement savings throughout this pandemic. Tell us a little bit more about the research.
MICHAEL FINKE: Yeah, we've done two recent studies of behavior during the pandemic. And both of them really focus on these Target-Date savers. And one really emphasizes the benefit of being a Target-Date saver, because you are so passive. And the other is maybe talking a little bit about the downside of being a passive saver, especially when you're trying to implement some kind of a policy that requires those savers to be active.
So what we did is, we looked at participants in those industries that were hardest hit by the pandemic. and we had new legislation which allowed them to access money in there 401(k)s. And what we saw was that it was those passive savers that really failed to access that money when they needed it. And more active savers were more likely to withdraw money from for 401(k) plans to supplement their income, during a period when it was really necessary to try to find some liquidity. So you see that the passive savers, on the other hand, during the March crisis, when the market went down by 26%, they were less likely to pull their money out of stocks, whereas more active savers were far more likely to pull money out of stocks, especially those that were close to retirement.
So passive savings, it's important for policymakers to remember that there is positives and negatives to passive saving. Positive is that you don't do much. And negative is that you don't do much.
KRISTIN MYERS: Well asking about this, I'm wondering if those worries, more broadly, that struggling Americans, are as you're pointing out, because of the pandemic, and needing that liquidity, are essentially reducing their cushion for retirement. And this, of course, is happening in a country where we already hear study after study, expert after expert, already saying folks are not saving enough money for their retirement.
MICHAEL FINKE: That's correct. And it's one of the reasons why there was a motivation to do essentially the SECURE Act to, a supplementary SECURE Act, to provide additional incentives for a range of different workers to save more for retirement, using these defined contribution plans.
KRISTIN MYERS: I want to ask you, Michael because this Funding Our Future segment, we like to talk about essentially saving for retirement. And I know this is a topic that you discuss a lot. I'm wondering if there's ways to navigate through the financial hardships of this pandemic. I know that the light is at the end of the tunnel for many, because we now have this vaccine news. But still, we are seeing Americans struggle. I'm wondering if there is a way to navigate that without negatively impacting your retirement, because folks generally get negatively dinged if they pull money out of there 401(k)s a little too early.
MICHAEL FINKE: Yeah, you know, it's-- the good news-- and it's not really good news for anybody. But if you are going to be pulling money out of your 401(k) because your income has fallen in 2020, then it's not-- you're not going to be able to do it without a penalty if it was COVID related. And your income tax rate during 2020 may not be as high. So if there was ever a time to access these funds to be able to supplement your spending during a period where you really just need to make it into a period where the economy recovers. Maybe it's a few months. Now is not the worst time to be able to access those funds. Build it up later, when you have a little bit more of an ability to, because your income is higher.
KRISTIN MYERS: All right, Michael Finke from the American College of Financial Services, thank you for joining us for our Funding our Future segment. Funding our Future is an alliance of organizations dedicated to making a secure retirement possible for all Americans. Hope you have a great holiday. Thanks for joining us.