The pandemic and ensuing “Great Resignation” are accelerating an already concerning rate of leakage from employers’ 401(k) plans, negatively impacting both employers’ costs and plan participants’ retirement readiness. In this environment, it is especially critical for businesses to educate employees about the rules for early withdrawals and separations from service and the options available to help prevent further leakage from their plans.
According to a report issued by the Congressional Joint Committee on Taxation in 2021, roughly 22 percent of the net contributions individuals aged 50 and younger made to their 401(k) retirement plans leaked from those savings accounts in 2003 and 20151 . In this sense, retirement plan leakage can be defined as a depletion of assets from employer-sponsored defined-contribution plans, or when distributions taken by plan participants prior to retirement exceed their individual contributions. Some of the most common reasons for this can be attributed to plan participant’s hardship withdrawals, loans that participants fail to pay back and accounts that participants cash out. Thankfully, there are some things employers can do with the guidance of their plan advisors to reduce this outflow of funds from their plans.
Employee education is perhaps an employer’s most critical tool to help reduce 401(k) plan leakage. Training is the best way to help your employees help themselves and protect your plan.
First and foremost, employees must be taught the rationale for using a 401(k) plan to prepare for retirement and recognize how those savings fit into a larger retirement-spending plan. They must also distinguish the difference between retirement accounts and other savings vehicles, including emergency savings that can be accessed free of penalties. In some instances, plan advisors may be able to help employers establish payroll-deduction programs designed specifically to help workers save for emergencies.
Employers can also be proactive and require employees requesting early withdrawals and/or hardship loans to first meet with an advisor to ensure they fully understand the impact of their actions. Employers may also choose to limit the reasons for allowing hardship withdrawals or even restricting or extended loan repayment terms. However, each of these decisions must be included in plan documents and clearly communicated to plan participants in a timely manner. Additionally, advisors can help employers establish programs, documents and training to help employees who separate from service rollover existing plan balances into new employers’ plans rather than cashing out.
While the decision to take a loan or early withdrawal from a defined contribution plan is a personal choice, too often plan participants fail to recognize the impact of their decisions until it is too late. Similarly, many employers learn the hard way how their failure to address these issues and take the lead in educating employees can yield negative results. To avoid these scenarios, plan sponsors should work with financial advisory firms with the knowledge, experience and time needed to help plan participants navigate the ins and outs of their retirement benefits and understand the short- and long-term impact of their decisions.
About the Author: Olga Ismail is a retirement plan consultant with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance cannot be guaranteed. Matching contributions from your employer may be subject to a vesting schedule, please review your retirement plan documents or consult with a financial professional for more information.
Posted on February 2, 2022