Help is here for 401k plan advisors and plan sponsors to identify and address the five biggest potential roadblocks to successful retirement outcomes.
A new White Paper from the Defined Contribution Institutional Investment Association, “Five Practical Barriers to Better Retirement Outcomes: Assessing Challenges and Taking Action,” is intended to raise awareness of these barriers and encourage action to overcome them.
During this time of economic distress, plan sponsors may be examining their plan documents and having internal discussions about potential changes that may need to be considered to preserve their near-term financial stability.
DCIIA says it encourages plan sponsors to consider the points raised in the paper as part of their deliberations.
In particular, DCIIA notes including potentially timely issues such as:
- Missing participants: Now is a good time to assess a plan’s current process for managing participant information and ensuring it’s updated.
- 401k loan leakage: Loan defaults may increase during an economic downturn. It’s a good time to assess how effectively an organization is communicating with participants about outstanding loans. Plan sponsors may also want to ensure that employees are aware of other options besides taking out a 401k loan.
Other potential roadblocks discussed in the paper include the movement of assets out of plans via rollovers, participants leaving the plan at retirement, and obstacles to in-plan annuities.
To help defined contribution plan sponsors address these potential issues, at the end of each section the paper provides a key takeaway along with questions that plan sponsors can use to tackle the issue.
“Even in the midst of a crisis, plan sponsors and their service providers should remain focused on incremental actions to address administrative, operational and inertia-based challenges that may be negatively impacting outcomes in their 401k plan and the retirement security of its participants,” said Lew Minsky, President and CEO of DCIIA. “While we collectively focus on navigating today’s challenges, we also encourage plan sponsors to be mindful of their long-term goals and helping to ensure the retirement security of America’s workers.”
401k loan leakage
401k loans have been a hot topic of late, as the CARES Act provides new options for participants to use the money in their 401k accounts to survive financially through changes in the participant loan rules and provisions for special coronavirus-related distributions.
The CARES Act provides flexibility to plan participants directly affected by COVID-19 to take a comparable 401k plan loan rather than a coronavirus-related distribution. For 180 days following March 27, a participant can take a loan in an amount equal to 100% of the vested 401k balance, up to a maximum of $100,000. Normally, loans are limited to 50% of the vested account balance, subject to a maximum loan amount of $50,000.
Participants may also delay for one year any existing 401k loan repayments that would otherwise be due between March 27 and December 31, 2020. Loan repayment schedules will be adjusted to reflect the delayed payment and interest accruals during the delay.
While a major cause of 401k leakage has been loan defaults, the DCIIA paper says eliminating loans as a plan feature is probably not a viable answer to preventing inadvertent leakage.
“Recent research shows us that participants often borrow to pay off debt or for other financial emergencies. Without the loan feature, they could be forced to take a hardship withdrawal—which is guaranteed leakage,” the paper says. “In fact, hardship withdrawals have been increasing, due to regulatory changes this year that make them easier for participants to take. If loans were eliminated, this increase could get even worse.”
A good first step
The paper wraps up by saying that recognizing these five barriers is a good first step to improve retirement readiness for America’s defined contribution plan participants.
“Having conversations with service providers and industry associations, as well as collaborating with other like-minded plan sponsors,” the paper concludes, “can go a long way to help remove some of these barriers, thereby making the participant’s road to a successful retirement as smooth as possible.”
“Five Practical Barriers to Better Retirement Outcomes: Assessing Challenges and Taking Action,” is one of many papers that are available to all interested parties in DCIIA’s online Resource Library.