Best Practices for Reducing Loans, Hardship Withdrawals, and Impulsive Investment Decisions

DSC_0232a4r
Image by ghknsg548 via Flickr
These practices will not only help employees successfully retire, you will also reduce the workload of your staff. Employees must be reminded that the money in their 401k plan is protected from creditors in the event of bankruptcy.

Employees who take 401k plan loans contribute less for retirement. According to the Aon Hewitt study Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income, employees with loans have an average contribution rate of 6.2% while employees without loans contribute on average 8.1% to their defined contributionplans. This difference in contribution rates could mean tens of thousands of dollars to participants in retirement. The study also noted that withdrawals (including those due to hardship ) have a great impact on retirement income as well, noting that full-career contributors who take withdrawals and stop contributing for two years thereafter reduce their retirement income by 7% to 25% depending on income and enrollment methodology.Investment timing can negatively affect investment performance, but many employees don’t know what else to do when they don’t understand basic investment strategies. A recent study by Fidelity Investments® showed employees that moved all of their funds out of equities during the recession of 2008 – 2009 experienced an average increase in account balance of only 2% through June 30, 2011 while those who maintained their investment strategy realized an average account balance increase of 50% during the same period. Reducing impulsive investment decision making and encouraging strategic decision making will improve retirement preparedness along with employees’ investment confidence.

This is a problem that could come back to haunt employers. There is a growing concern that lawsuits from employees who claim they weren’t given enough information on how loans, hardship withdrawals, and poor investment choices could severely impact their retirement may increase. The claim may be that employees shouldn’t have been allowed to take loans or hardship withdrawals, or that they should have been given more information on asset allocation.

The 401(k) plan has become the sole source of retirement for many Americans. Yet many see their 401(k) account balance as a source of emergency funds. This will negatively impact their ability to retire when they choose.

Please comment or call to discuss how plan design can improve your plan.

Enhanced by Zemanta

Leave a Reply

Your email address will not be published.