SURVEY SAYS: Is KETRA a Good Idea?

September 29, 2005 (PLANSPONSOR.com) - President Bush last week signed into law H.R. 3768, legislation that affords much greater flexibility for those impacted by Hurricane Katrina to access their retirement savings. This week we asked readers what they thought of the measure.

The most common response this week, cited by 40% , was that the law was a bad idea.   The reasons were varied and expansive, but mostly they came down to “this money is for retirement,” generally with a subtext concern that the money would never be restored to the individual’s retirement savings account.  “Isn’t “retirement” savings for…retirement?” noted one.  “This seems like a short-term fix to an immediate problem that may cause additional problems as years go by when people are faced with retiring with less savings than they had originally planned. Wouldn’t it be smarter for the government to make available low- or no-interest loans?

  

A number noted concerns about how effective the assistance would be.   As one noted, “Most likely the people who need the help the most will not have much money in their 401(k) to borrow/withdraw then either.   These provisions will cause plan sponsors and record keepers more work, but will not provide a benefit to the majority of the people who need assistance.”  Another said it was a “Bad Idea with good intentions – people who are already strapped may take these distributions – fix their current situation but what about the income tax they will have to pay?   Who will help them out with that?   What happens when they retire – Katrina will still have effects 20 years down the road!”

“How is no withholding supposed to “help” come April 15 if normal taxes still apply?” noted one.   “Waiving the 20% withholding saying taxes will be imposed later is a smoke and mirror trick.   Those taxes will later be relieved and when they are we’ll have to hear about how only the rich with $100,000 got benefit of the relief,” was the concern of another.   Among the 15% that chose “other”, was the reader who split the difference, noting “d) Good: waiving the 10% penalty; Bad: non-imposition of the 20% withholding.”

For many, it was an issue of “fairness.”   One noted, “While I empathize with the large number of people affected by Katrina, from a plan perspective, they should be treated no differently than any other plan participant who suffers a personal tragedy.   The government’s willingness to relax rules when there is a lot of publicity available seems to be a political ploy that is becoming more and more common.    It just makes it harder for those of us who have to interpret and enforce the rules.”    

Another said, “I think it is a bad idea for everyone.   Congress should decide if plans are for retirement, or for a personal savings account.   It appears they have opted for savings plans to be raided instead of a retirement plan.   If they are going to change the rules, it should apply to all future hurricanes and all presidential declared disaster areas.”

Another reader noted, “Our participants were hit just as hard last year (3 hurricanes in 6 weeks) in central Florida.   They weren’t given any special allowances so they found other ways to take care of their needs.” 

However, roughly one in five thought it was a good idea.   As one noted, “While it may be bad at retirement time, how can you explain that to someone who may have lost their house and all they own and don’t have any or inadequate insurance.   I do think they should have some kind of help in exhausting all other avenues of financial help before taking the money.”

  

Another noted, “I think it is a very good idea.   However, many companies were also hit by the hurricane, and I wonder how many may actually be in a position with readily available infrastructure to process the withdrawals or loans.” 

“I think in general it’s a good move for the people that need it most,” observed one.  “We have a production plant in Jefferson Parish, LA, which miraculously faired quite well considering the devastation around it,   but about a third of our employees lost everything and need to rebuild from the ground up.   One of our employees is splitting his time between living in a shelter and his car and needs any help he can get.   We’re going to go ahead and make the necessary amendments in order for the affected employees to get their funds out with the understanding that this would be a last resort.”

Another simply said, “It a great idea – from a 401K plan administrator with employees in Houston and Louisiana.”

Roughly a quarter of respondents said it was a good idea, but would be a pain to administer.  “How are administrators supposed to know who is impacted?” wondered one.  “We can’t go by zip code because the addresses on file may not be their permanent address, and once they change the address, we don’t go back to the old addresses.   So we’ll need a “Katrina” flag.   Who’s going to fill this flag?   Can we rely on the data from the plan sponsor?   Chances are, they are under water as well…I think this sets a precedent that we should expect to be repeated in the future.

“Who is going to pay for all the programming changes and the additional staffing?” wondered another.  

A number of readers among all types of respondents took issue with the current limitations.   As one noted, “It is amazing to me that the current safe harbor hardship rules take into consideration secondary school tuition, but not natural disaster recovery efforts.   The new addition to the safe harbor reasons for expenses to repair damage to the principal residence as a result of a casualty appears to attempt to address this issue.   However, there are many other costs which result from a natural disaster which most sane people (I guess that excludes bureaucrats in Washington DC) would agree are much more of a hardship than college tuition.”

Most of the “other” responses went something like this “It is not only a BAD IDEA, but also, a PAIN to administer.”

Also in that grouping was the reader who noted, “If you’ve lost your house, your dog and are starting to feel like a classic country song, then this is definitely (a) a good idea.   However, I’m afraid it’s going to be (b) a bad idea for the participants who may be causing themselves a greater financial hardship in the short and long term.   We have fellow friends, family, coworkers, etc. whose lives will never be the same, so I cannot answer (c) in good conscience.   I’ll take the pain of figuring out the administration if it means that I can help someone else.   But (d), good luck to us all.

But this week’s Editor’s Choice goes to the reader who acknowledged, “Yes, it’s an administrative hassle, but I’ll gladly go through whatever we have to do to help our employees get through this nightmare.   Besides, what 401k amendment isn’t an administrative hassle?”  

Thanks to everyone who participated in our survey. 

I'm right in the midst of this.   I think in general it's a good move for the people that need it most.   We have a production plant in Jefferson Parish, LA, which miraculously faired quite well considering the devastation around it,   but about a third of our employees lost everything and need to rebuild from the ground up.   One of our employees is splitting his time between living in a shelter and his car and needs any help he can get.   We're going to go ahead and make the necessary amendments in order for the affected employees to get their funds out with the understanding that this would be a last resort.

Yes, it's an administrative hassle, but I'll gladly go through whatever we have to do to help our employees get through this nightmare.   Besides, what 401k amendment isn't an administrative hassle?

Have a great day!

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I think it is a very good idea.   However, many companies were also hit by the hurricane, and I wonder how many may actually be in a position with readily available infrastructure to process the withdrawals or loans.  

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Bad idea!

Just another example of how everyone out there seems to think that a "retirement plan" has lots of other uses beyond that of retirement income.

It's a shame what happened.   What would have happened if the workplace was populated by defined benefit plans and not DC plans? They wouldn't be perceived as such an easy repository for monies for any and all purposes. They are for retirement!

And, shouldn't each and every 401k participant be taught that this is their own personal defined benefit plan?   They will need a pot of money to create income when they stop working. At least that's what we're telling all of our retirement plan clients.

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Even though I feel for the hurricane victims, I think that this is another "feel good" response to a horrible situation.

If the account is depleted by withdrawal, where does retirement income come from?

If the account is loaned out, where do repayments come from?

If the tax withholding is not withheld, how will the ultimate tax liability get paid, or will that be forgiven too?

All I see this proposal doing is aggravating an already bad situation by delaying another effect.

All of these recovery proposals "feel good" but I'm still wondering who's gonna ultimately pay for it all.   The ripple effect will be horrendous and, I'm afraid, even worse than the hurricane in the first place.   We all may just want to get on that port laden transportation bill "bridge to nowhere" and walk off the end of it when the coffers finally run dry...or wish we had been part of the disaster in the first place, 'cause the payment due date is gonna hurt just as much or worse.

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I think a, b, and c.   It is a good short term solution to allow people in need to access funds to help stabilize their lives, and waiving the penalty and tax withholding allows more cash to be available.  

It's a bad idea for those who may not have the wherewithal to replenish those funds before retirement, or when they are faced with income taxes.   And, like most good intentions, there will be challenges and burdens to be overcome.

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I do not think this is a good idea.   Yes it would help for today, but I think it will cost too much in the long run.   The lost potential income (earnings and interest) and the effect on the final amount available at retirement will have a serious impact when the participant wants to retire.   Are the recipients of this largess then going to expect the government (you and I) to make up the difference in retirement income because the government told them they could have the money penalty free?  

Besides all that, what a hassle for the sponsors and the administrators.   And, who is going to pay for all the programming changes and the additional staffing?  

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C. but will be tough fro those who have not made up the amount with interest by retirement.

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I think it is a very good idea.   However, many companies were also hit by the hurricane, and I wonder how many may actually be in a position with readily available infrastructure to process the withdrawals or loans.  

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(b) a bad idea -    While I empathize with the large number of people affected by Katrina, from a plan perspective, they should be treated no differently than any other plan participant who suffers a personal tragedy.   The government's willingness to relax rules when there is a lot of publicity available seems to be a political ploy that is becoming more and more common.    It just makes it harder for those of us who have to interpret and enforce the rules.  

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Although I can understand the underlying argument for H.R. 3768, I do not think it is a good idea.   401(k) plans are meant for retirement. Given the notion that the hardship withdrawal can be for anything, you can bet that this will be abused.

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I guess I have to say none of the above - I have mixed feelings about it.   I understand folks are hurting but I can't help but recall wistfully the days of defined benefit pension plans when you couldn't take the money out early no matter what, and so you knew it would be there when you retired.   Once the funds are withdrawn, they're gone - and it would take a long, long time to build the fund back up, especially since contributions are limited by law.   I suppose I have less of a problem with increasing the loan limit - but allowing borrowing up to 100% of the balance seems a bit idiotic.

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I guess my answer is (d)- other. This administration jumped on the Katrina bandwagon with too little retirement-expert advice on this one.   What happens to the ERISA requirement that loans be adequately secured, and the DOL's requirement that provides no more than 50% of a participant's vested account balance may be used to meet the ERISA security requirement? I don't think many plan administrators will mind the additional burden to administer these loans if only Washington wouldn't make these grandiose gestures and then walk away to let the little guy struggle to comply with new law and still maintain the integrity of the plan.

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It is a good idea, in theory, but it is impossible to avoid abuses, and difficult to administer.   How are administrators supposed to know who is impacted?   We can't go by zip code because the addresses on file may not be their permanent address, and once they change the address, we don't go back to the old addresses.   So we'll need a "Katrina" flag.   Who's going to fill this flag?   Can we rely on the data from the plan sponsor?   Chances are, they are under water as well.   Can we trust the participant?   Probably 80% of the time.  

Loaning 100% of a participants balance is the bigger nightmare.   In a daily val world, we'll need to adjust the amount that the participant receives, and the loan repayment, at the last minute.   Not fun or easy.  

In general, I am in support of participants having access to their money in emergency, and this certainly qualifies.   The only issue that this should not be approached as a 'one-time' only fix.   I think this sets a precedent that we should expect to be repeated in the future.   .  

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(B) it's a little band-aid for a big sore.   They keep telling us Social Security will not be there for us and to save up in our 401ks and now they tell you to use your retirement to help you get back on their feet.   Is the government going to assist these people when they retire when they have no money to retire with?

D)   Other.    This is a bad idea for long term/retirement goals of the people involved.   But given the desperate situation so many are in it may be their only option.   The loans are probably not as bad an idea as the money will go back in and given the way the market is going this may leave them with more than if they stayed invested in other options.   

This will only help(?) people who have enough income to be in a 401(k), have one available to be in, still have a job/employer so they can access the money & pay back any loans.

Why would this not be a hardship distribution not subject to the 10% penalty anyway?

The real issue is ..................

What happens to the 401(k)s of companies wiped out by Katrina/Rita?   If the company no longer exists they are terminated even if that is not the official designation for a while.    What kind of a nightmare is it going to be to pay them out when the company may not exist, the owner may be dead and the participants scattered all over the place.   

What happens to participants whose plans were recordkept by lawyers & CPAs who have lost their offices/lives?   I know there are a lot of small plans like that because the people doing that, lawyers & CPAs, have taught classes I've attended.   If the participants still have records that would help but a lot of them will not have anything.   

Obviously the worse situation would be a company wiped out with its plan invested/recordkept with a company wiped out.

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B;     the gov't doesn't allow hardship w/ds from SS.    In the future when they have no money in retirement they'll   ask for another handout.   I'm upset to see people suffer   but come on   what do expect when you live below sea level   People should bear some responsible for what happens to them.  

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a)   It a great idea - from a 401K plan administrator with employees in Houston and Louisiana

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(d) other.   If this disaster had affected our employees here in Delaware, the proposed wouldn't work.   They wouldn't have enough funds in their account eligible for loans or hardship withdrawals!   Our hourly employees take out loans like they use credit cards.   Hardship withdrawals are another issue here for us.   We know we need to educate our employees about "financial wellness", but it's a huge struggle.   With the average national account balance at $36,000, only those who really need to be saving more for retirement would more than likely take advantage of such a feature, anyway.

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(a) a good idea!

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(b) a bad idea.  

This is setting a very dangerous precedence

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HR 3768

Bad Idea with good intentions - people who are already strapped may take these distributions - fix their current situation but what about the income tax they will have to pay?   Who will help them out with that?   What happens when they retire - Katrina will still have effects 20 years down the road!

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I think I have to go with D -- other....it is not only a BAD IDEA, but also, a PAIN to administer.   Who takes the burden of proof, the trustee?   What is the burden of proof??   And, of least importance (lol) doesn't everyone at the government level understand that individual savings in retirement plans are woefully behind where they should be for retirement already!!!!   Can't wait to see the nickel I get from Social Security in 40 years!

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I think it's a combination of (c) and (d).   While it's undoubtedly a pain for those that have to administer it, I'm not sure it's a good idea.   How is no withholding supposed to "help" come April 15 if normal taxes still apply?

And if the hurricane victims deplete their retirement accounts now, what are they supposed to retire with?   Why not offer them a low-interest government-backed loan for use now?   I guess I have more questions than answers, but in the long run I don't see this as being all that helpful.

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On the whole, I think it's (b), a bad idea.   I understand that for many people, their retirement plan is their biggest asset, and they want to be able to tap it for emergencies.   However, I think the hardship and loan rules were already liberal enough to cover most situations.   Also, (and I speak as one with loved ones who live(d) in New Orleans) there's a bunch of money available through FEMA and other sources.   I do favor the expansion of safe harbor hardship rules to include expenses from the recovery of a natural disaster.

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It is a (a) good short term idea to let these people access the money to help them in this time of need, (b) a bad idea for the long term because the people that take the distributions will never be able to make up the "lost" retirement savings, (c) definitely a pain to administer it, and (d) more politically motivated than anything else; hopefully helping his approval rating so that he can get some other legislation passed - like some real tax reform.

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I say D   other.   I agree it will be a pain for those that administer it.   It will also be a pain for those that have to audit it.   Not just the IRS or DOL, but, the independent auditors.   Then again, the independent auditors never do a good job IMHO.  

I think it is a bad idea for everyone.   Congress should decide if plans are for retirement, or for a personal savings account.   It appears they have opted for savings plans to be raided instead of a retirement plan.   If they are going to change the rules, it should apply to all future hurricanes and all presidential declared disaster areas.  

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My response:   (D)   other

The diligence on who actually qualifies as 'needing' vs 'wanting' sounds like a nightmare.   Removing the lending limitations I agree with; removing the withdrawal penalty I am OK with, removing the pre-retirement withdrawal tax I DISAGREE with.   My concern is people will flock to their own tax-free, interest-free money with no plan for restoring those retirement savings and destroying the unrecoverable potential of the compounded growth of their retirement wealth they worked so hard to build when, I suspect, plenty of low interest loans, insurance, and aid will be available

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I have to go with a (d).   Overall giving access to the funds is a good idea.   This is a true emergency and taking away the 10% penalty is a good humane move.   Waiving the 20% withholding saying taxes will be imposed later is a smoke and mirror trick.   Those taxes will later be relieved and when they are we'll have to hear about how only the rich with $100,000 got benefit of the relief.   I'm selling my television, I can't listen to this anymore.   Most will spend every cent and claim additional hardship later leaving the rest of the tax payers to pick up the additional tab.   This will be another hidden tax that will not be counted in the overall cost of recovery for the area.  

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(d) other: a horrendous pain for the TPAs who operate out of the hurricanes' affected areas. It's Humpty Dumpty time; I'm not sure what the chances are that all the companies and all the employees will ever get back together again especially with our king and his men. Thus, for many of these people, they may eventually get every drop of their pensions due to termination (self or plan). It is really difficult to understand the depth to which the damage has gone and you have to be a "glass half full" kind of person to think there will be a fast or complete recovery. It boggles the mind.

My answer is (c).   These are people who may really be SOL.   While we argue this is retirement money, not current money, the money may be necessary to get back to regular life so they can even make it to retirement.   As the saying goes, people don't need a handout, they need a helping hand.   This is their own money so they will use it judiciously.   This solution of easier access to retirement funds and waived withholding taxes is a good thing.   However, administrators don't even know yet the implications.   The higher loans are going to ripple through administration for years.

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From a retirement point of view it's a disaster - that money will never be put back.   But, if people understand the consequences and that is their only source of funds, it should be ok.

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It's a good idea that is entirely consistent with my view that 401(k) plans are not, after all is said and done, retirement plans.

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That's a good question, and I would have to say I have mixed emotions about it. I know some of these folks are in a real financial pickle. The biggest problem is we would be using future retirement funds to meet an immediate need. Isn't "retirement" savings for...retirement? This seems like a short-term fix to an immediate problem that may cause additional problems as years go by when people are faced with retiring with less savings than they had originally planned. Wouldn't it be smarter for the government to make available low- or no-interest loans? With these retirement fund distributions not being subject to tax withholding and penalties, the government will be getting less short-term revenue on these distributions.

Why not protect retirement savings by not making it easier/more attractive to take those distributions and instead making money available other ways?

Now for a technical question - most recordkeeping systems have the loan limits hard-wired in there. How are you going to override to allow for a $100,000 loan when the regulations are in there limiting the loan to $50,000? Are the software vendors going to be able to send out a temporary patch to make the systems able to allow for, calculate, and amortize such loans? Who will be eligible to get it the patch? and for how long will such loans be available?

So how is all of this going to be controlled? It seems like an administrative nightmare, and I'm thankful we are small enough and far enough to the north that we have no plans that will be able to make distributions or new loans on this basis.

That was the long answer, and I guess it's (d) other, but it seems like it's probably (b) a bad idea.

Looking forward to the general survey results....

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a) If this is the participant's only source of funds, it is a good idea.   No amount of local, state, or government support is going to supply all the needs of individuals in this situation.   I would say c) but it wasn't that much difficulty to set up and administer.   We have several locations in the New Orleans and Texas/Louisiana border areas, have made hardship withdrawals related to the hurricanes and expect to make more.  

It is amazing to me that the current safe harbor hardship rules take into consideration secondary school tuition, but not natural disaster recovery efforts.   The new addition to the safe harbor reasons for expenses to repair damage to the principal residence as a result of a casualty appears to attempt to address this issue.   However, there are many other costs which result from a natural disaster which most sane people (I guess that excludes bureaucrats in Washington DC)would agree are much more of a hardship than college tuition.

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What a horrible idea! B for sure! This country can't and should not allow specific cases special tax treatment for 401(k)'s. It's like rewarding someone for tragedy. And why is a hurricane victim different or "better" than a victim of domestic violence or cancer? Stupid.

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D. Other

Based on news reports the majority of Katrina victims   lived at or beneath poverty level.   They most likely have little or no money in their 401(k).      But if we assume they did have money in their 401(k) and they initiate withdrawals, how much money will they have left when they retire and what if there is a similar disaster in future years.

Most likely the people who need the help the most will not have much money in their 401(k) to borrow/withdraw then either.   These provisions will cause plan sponsors and record keepers more   work but will not provide a benefit to the majority of the people who need assistance, it will only reduce their 401(k) balance when they retire even further.

However, I am not without compassion, I understand that the victims have nothing so    if this is the future trend... then   the powers that be need to make a special type of withdrawal for these type of disasters , include any hurricanes, earthquakes etc so that   options are available immediately to victims of these disasters.

Additionally steps need to be taken to   educate people on the importance of flood insurance and   earthquake insurance etc..., if   they choose to live in places where these disasters occur they need to be educated on the   costs associated with the risks they choose to occur and plan accordingly. ( meaning   buy insurance, save money to be used only for emergencies, have a plan to leave the area sooner rather than later in the event one can see the disaster coming)

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Perhaps "c" - maybe "d" - but I'm afraid that we are setting a precedent.   Even though this was an unusually horrendous disaster, what's to say that Rita shouldn't fall under the same guidelines or Ophelia that hit the NC coast causing widespread flooding and erosion of the beaches and dunes.   Who's to say that the special provision can't get backdated so that victims of Andrew or Floyd can seek relief?  

I truly feel for the individuals whose lives have been devastated by Katrina but I don't think this is the way to go.   Those that will need it most - ie, the residents from the 9th ward and others - probably don't have money in a 401k anyway.  

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I think allowing 401(k) withdrawals because of Katrina is terrible pension policy.   There are now numerous sources of help available to Katrina's victims, but when they turn 65, there will be nothing.   The purpose of a pension (and its tax favored status) is to provide funds for retirement--not for current emergencies.  

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c) a good idea for those who needing the distribution, a pain for those who have to administer it.

Specifically regarding 401(k) Loans - our record keeping system is programmed with the current loan maximums and anyone in the effected area will have to be manually updated to allow for the new loan amounts.   Since we have over 32,000 participants in our Plan, this could add up to a lot more work.

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(b) a bad idea.

I would like to know what is going to happen to the billions of dollars that the government is giving and the millions upon millions in donations. What about all the hurricanes that hit Florida last year? My grandmother is still trying to get her place back in order, not to mention all the price gouging that is still happening! She didn't get a debit card in order to purchase a Louis Vuitton handbag!

C, I hope they extended the payback time.

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d:   Other - or All of the above.   While it may be bad at retirement time, how can you explain that to someone who may have lost their house and all they own and don't have any or inadequate insurance.   I do think they should have some kind of help in exhausting all other avenues of financial help before taking the money.   God Bless them.

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Our participants were hit just as hard last year (3 hurricanes in 6 weeks) in central Florida.   They weren't given any special allowances so they found other ways to take care of their needs.  

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I feel that it is a very bad idea.   As is the case generally with congress, they are very short sighted and so is their solution.   Such distribution will have a significant impact on the retirement income for the affected individuals.

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( c ) - Great idea - but horrible to administer.    

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d) Good: waiving the 10% penalty; Bad: non-imposition of the 20% withholding

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I think opening up the 401(k) plans and other retirement plans is a bad move.   This is only going to keep the folks, that have contributed, afloat only a short period of time.   Without additional contributions to their plan, those individuals stand to lose the ability to retire.   I feel Welfare and Unemployment should get tapped first.   Maybe we should stop paying politicians so much money (Pennsylvania fat-cats gave themselves a 30%+ raise), and divert those funds to help people that lose everything.   Our country is too willing to help out every other country with huge checks in-hand, but when it comes to U.S. Citizens, our country turns its back.   I found it sickening that Bush signed a Bill that allows workers in the affected areas to be paid less than the area average.   As luck (only for those who've sold their soul to the devil) would have it, the Bush administration gives the reconstruction contracts to a Halliburton subsidiary and another one of Bush's buddy's companies.   These companies will still collect the same over-payment from the U.S. Government, but pass on even less than they should to the locals that have pride and determination to rebuild what was lost or damaged.   In my eyes, this is where the government is failing horribly.   One question, why wasn't Bush as eager/proactive to assist Louisiana and Mississippi as he was to help Texas?   It makes one think.

Thank you for my time on the soapbox!

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"b" - A bad idea.   While I think adding additional language to the safe harbor rules for hardship withdrawals to cover rebuilding and other expenses due to a hurricane, tornado or other natural disaster is a good idea, encouraging people to raid their retirement savings by removing some of the safeguards that have been in place (such as the 50% loan limit) is very short sighted.   The affected group could be much better served by the government providing aid and no-interest loans.

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(b) Bad idea.   Anytime you start the exceptions, it is a retirement plan. First hardships, then loans, now hurricanes, no withholding tax, Rita ???   We had rain from Katrina, will that count.    Heck, let's just make it a Christmas Club.

Nevin, as the plan administrator, I hope you see my frustrations. I feel sorry for the people,   we are helping, there will be aid but to open this up, I can't see it stopping at this.

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A.   It's a good idea, but it makes me worry about the additional funds these folks will need at retirement.   Good thing Bush is so distracted that he can't take away SS now.

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