Benefits

Plugging DC Plan Leaks

October 4, 2013 (PLANSPONSOR.com) – Plan sponsors can go a long way towards reducing leakage from defined contribution (DC) retirement plans.

By John Manganaro editors@plansponsor.com | October 04, 2013

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 include:

  • 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 matching contributions.

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.

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