An article in the Wall Street Journal highlights a growing problem for American companies: employees who use their 401(k) plans like ATMs – tapping their retirement savings for loans, or just cashing them out completely – paying taxes and penalties in exchange for access to their funds. In fact, a report by the Defined Contribution Institutional Investment Association (DCIIA) cites a Federal Reserve Board study that found 40 cents of every dollar contributed to the defined contribution accounts of people under the age of 55 “leaks” out of the retirement system before retirement!
In addition to lost retirement savings for consumers, which is bad enough, experts warn that leakage also hurts employers. When older employees, who are typically higher paid, can’t afford to retire, employers can’t replace those workers with younger (and perhaps less-expensive) employees.
As fiduciaries, 401(k) plan sponsors have an obligation to provide a summary plan description that explains participants’ rights and responsibilities under the plan. According to Department of Labor guidelines, the summary must include information about:
- When and how employees become eligible to participate;
- The source of contributions and contribution levels;
- The vesting period, i.e., the length of time an employee must belong to a plan to receive benefits from it;
- How to file a claim for those benefits; and
- A participant’s basic rights and responsibilities under the Employee Retirement Income Security Act (ERISA).
But as part of a requirement to act solely in the interest of plan participants and their beneficiaries, some employers are taking things one step further. For example, as the Wall Street Journal article highlights, Home Depot warns employees of the financial implications of borrowing or pulling money out of their 401(k) plan accounts. Other companies require participants to talk with a financial adviser – at the company’s expense – before borrowing from their 401(k) plans. And some have developed separate loan programs to keep employees from tapping into their retirement funds.
One problem preventing employees from rolling over their assets from a previous employer to their current employer’s plan is a sheer lack of knowledge about how to do it. DCIIA found that nearly half of its survey respondents left their retirement assets in their former employer’s plan, and that doing so was consistent across generational groups. When asked why, just 20 percent of the respondents expressed a well-defined reason for not moving their money. Barriers to moving assets included not knowing how, not having time, or not considering it a priority.
To plug 401(k) leakage, DCIIA suggests that plan sponsors spend more time educating new and existing employees about consolidating their assets, which makes sense. In addition, financial research firm Cerulli Associates suggests restricting the number of loans participants can take to just one, and having an adviser contact participants who consider cashing out to explain the employee’s lost future value.
Are you a plan sponsor who’s experiencing leakage? If so, AMDG Financial may be able to help. Our team of advisers is well-versed in the fiduciary requirements of plan sponsors. In fact, we’re a fee-only, fiduciary firm ourselves. As one of the first firms worldwide to be continuously certified by the Centre for Fiduciary Excellence (CEFEX), our Fiduciary GPS™ process makes us uniquely qualified to help retirement plan administrators minimize their legal risk and feel confident about their compliance with fiduciary requirements. To receive a complimentary, no-obligation assessment of your plan, contact us today. We look forward to serving you.
 CEFEX certified firms voluntarily undertake annual audits by independent expert analysts. The resulting assessment reports are reviewed by the CEFEX registration Committee. This continually verifies their adherence to the applicable standard and is supplemental to oversight performed by regulators, or financial auditors.
 CEFEX is an independent global assessment and certification organization. It works closely with investment fiduciaries and industry experts to provide comprehensive assessment programs to improve risk management for institutional and retail investors. CEFEX certification helps determine the trustworthiness of investment fiduciaries. To learn more about CEFEX, please visit www.CEFEX.org.