The Defined Contribution Institutional Investment Association has issued a report calling on employers to limit leakage from 401(k) plans, “Plug the Drain: 401(k) Leakage and the Impact on Retirement.”
Cashouts, hardship withdrawals and loans from defined contribution plans reduce by 14 percentage points the probability that low-wage participants will be able to replace most of their income in retirement after 31-40 years of plan eligibility.
DCIIA is asking employers to encourage new employees to rollover assets from prior employers’ plans and think twice before taking out a plan loan or hardship withdrawal. DCIIA would also like employers to encourage those who have taken out hardship withdrawals to again contribute to their plan.
“When it comes to American workers’ retirement income adequacy, policymakers, plan sponsors and the industry has tended to emphasize successfully enrolling eligible employees in their 401(k)s at robust levels—and that’s critical to rebuilding retirement income,” said Lori Lucas, the chairman of DCIIA’s research and survey committee. “Our new research underscores the importance of going a step further to encourage employees and retirements to retain assets in the DC plan.”
Lew Minsky, executive director of the DCIIA, “Plan sponsors and policymakers can have a big impact on the retirement outcomes of American workers. DCIIA is committed to improving outcomes in the defined contribution system by encouraging the use of plan designs that include a robust implementation of auto features, and by developing strategies that will reduce the leakage of assets from the savings system.”
According to research by DCIIA and the Employee Benefits Research Institute, cashouts can reduce the probability of participants successfully replacing most of their income by more than five percentage points. Hardship withdrawals draw that probability down by three percentage points.
DCIIA is asking policymakers to eliminate the ability for employees who have left a company to have the choice to cash out of their 401(k) rather than rolling it over. Rather, DCIIA believes cashouts should be limited to those in need, similar to in-service hardship withdrawals.For those who have taken out hardship withdrawals, DCIIA would like these employees to be able to continue to contribute to their 401(k). Currently, they are blocked out from doing so for six months.
As well, DCIIA would like the government to impose further limits on loans and to allow post-termination repayment of loans.
Barney writes for Money Management Executive, a SourceMedia publication.
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