October 4, 2013 (PLANSPONSOR.com) – Plan sponsors can go a long way towards reducing leakage from defined contribution (DC) retirement plans.
This can be achieved by taking a few preemptive steps, an
Aon Hewitt white paper found, especially when leakage is the result of
outstanding and defaulted loans borrowed against plan assets. Those steps
- Adding direct debit loan repayment options;
- Reducing the number of loans available to participant;
- Limiting loan dollars to those contributed to plan funds
by the employee; and
- Increasing loan origination fees.
The impact of these changes can be dramatic. Employers who
have a loan direct debit repayment option, for example, see 22% fewer defaults
than those that do not offer direct debit repayment.
Another telling figure from the study: Plan sponsors who
only allow participants to have one outstanding loan at a time report loan
balances that are $1,600 less on average than the balance among sponsors whose
plan participants can draw two or more loans.
Companies that do not allow loans on employer-provided
dollars in retirement plans see $370 less in average outstanding loan balances
compared to companies that allow employees to borrow dollars paid in as
And the most effective way to cut down on leakage and
outstanding loan dollars? Charge more in loan initiation fees. According to the
study, the average outstanding balance of loans that charged a loan origination
of $50 or less is over $4,600 more than the average outstanding balance of
loans that charged $100 or more.
A full copy of the survey and details about its
methodology can be found here.