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Cerulli Report on Leakage from Retirement Savings

Ellie Lowder, TGPC, Consultant

Citing a report Cerulli Associates prepared, a recent article notes that distributions and defaulted loans in 401(k) plans outpaced contributions to those plans in 2014, with some $81 billion in outflows reported. The report suggests that employers can take a role to limit plan leakage by placing significant limitations on loans in their plan documents.

While the Cerulli study, “Evolution of the Retirement Investor 2015: Insights into Investor Segmentation and the Retirement Income Landscape”, involved 401(k) plans, it would stand to reason that the same problem would apply to 403(b), and perhaps governmental 457(b) plans.

What can financial advisors do to help stem the outflow? According to the report, a different participant “mindset” must be a part of the dialogue. Financial advisors, at the time of enrollment with employees, should be discussing the importance of a long-term commitment to retirement savings with specific information of the cost of not keeping the retirement accounts intact. And, in the case of “serial” borrowers, and “serial” withdrawals, financial advisors should contact those participants to help educate them about, and reinforce understanding of, the negative impact on saving for retirement that multiple requests for loans and withdrawals can have.

The Cerulli report suggests that employers may wish to consider eliminating loans from their plans altogether; however, this author is concerned about whether doing so might lead to decreased participation in the plans. Rather than eliminating loans, employers might consider limiting the number of loans permitted at the same time, as well as potentially eliminating new loans when the participant already has an outstanding defaulted loan.

It also would make sense to review the hardship withdrawal rules to be sure that the only in-service withdrawals for hardship adhere strictly to the terms of the plan and the IRS regulations — that is, confirmation that the stated hardship exists, and compliance activities to establish that the involved participants have not already received a hardship withdrawal from other plans of the employer to fill the need, or from other accounts held in the specific plan of the employer.

Financial advisors also should discuss the employer’s concerns about leakage with the employer directly, and be prepared to make suggestions to help reduce the outflow from the employees’ retirement accounts.

Ellie Lowder, TGPC, Consultant

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.