“Plan leakage” is part of the lexicon of the retirement plan industry, but there is no standard definition for it, Jeff Fister, senior relationship manager at ADP, told attendees of the 2019 PLANSPONSOR National Conference.
He cited a Government Accountability Office (GAO) study which defined leakage as tapping into retirement savings prior to retirement. The GAO included in this definition hardship withdrawals, lump-sum payments made at job separation and loan balances that were not repaid. But, Fister said he believes current participant loans should be included since they pose a missed rate of return opportunity. In addition, his firm finds that participants with loans are saving considerably less in defined contribution (DC) plans than those without loans. “With one client, it’s about 30% less,” he says.
Fister noted that plan sponsors have a fiduciary duty to monitor loans just as with any other investment. He said the fact that the IRS is changing Form 1099 to capture data about loan offsets and that the GAO is recommending Form 5500 changes for loan reporting shows “Big Brother is watching, and plan sponsors should be mindful.”
However, Beth Pattillo, director of retirement programs at Leidos, a 2019 PLANSPONSOR Plan Sponsor of the Year finalist, said her firm believes “loans are not evil.” She said, “We believe loans serve a purpose, but we give participants strong education about what taking a loan can do to their retirement savings and why they really want to pay it off.” The firm also allows terminated participants to continuing making loan repayments after termination, to help avoid plan leakage.
Leidos said 54% of the company’s 401(k) plan assets are in terminated participants’ accounts. In addition to installment payments and partial withdrawals, terminated participants are allowed to take a loan from their accounts, with strong education about paying it back. “It allows them to have access to money they would have in other ways, such as from an IRA,” she said.
Speaking about other forms of plan leakage, Fister said plan sponsors may want to re-consider cashing out employees with small balances and educating employees about not cashing out their accounts when terminating. “Especially if a company often rehires employees that terminate, the plan sponsor wants the employee to come back in a better position rather than starting from scratch,” he said.
Pattillo said Leidos this year added and after-tax deferral option to its 401(k) plan. “We educate employees that their after-tax savings can grow and be used for emergencies, but they first need to defer enough compensation on a pre-tax basis to get the full company match,” she told conference attendees.
Leidos has also created a relief foundation funded by employees. “For example, if there is a natural disaster and a participant goes to our recoredkeeper to request a hardship withdrawal, the recordkeeper can tell him about this free, no-payback option,” she explained.
Pattillo noted that sometimes participants just cash out their accounts upon termination from the plan because the rollover process can be time-consuming and confusing. Leidos is working with Vanguard and the Depository Trust & Clearing Corporation (DTCC) to establish an electronic rollover solution. Leidos also allows terminated participants to roll money from other retirement plan savings accounts into the Leidos plan.Fister concluded that there is no one solution to discouraging plan leakage; it requires a handful of solutions. He said knowing plan metrics can help plan sponsors determine what to do, and getting anecdotal information from participants can help with communications. “Plan sponsors should use various methods of communication to reach participants where they are,” he said.