Putting limits on loans and encouraging retirees to leave assets in defined contribution plans are among the suggestions for addressing DC plan leakage, according to a report issued Monday by the Defined Contribution Institutional Investment Association.
“Leakage factors in DC plans can be an insidious drain on retirement income over time,” said the report, called “Plug The Drain.” The association said legislators and plan executives share responsibility for restraining leakage — the early withdrawal of assets for non-retirement purposes. Leakage includes loans from DC accounts as well as cashing out by participants who leave jobs and don't roll the money over into IRAs or other DC plans.
Many DCIIA recommendations can be done by plan sponsors without direction from Washington, Lew Minsky, the association's executive director, said in an interview. For example, sponsors can limit the number of loans and/or restrict the available loan balance, the DCIIA report said. “Some limits are probably a good thing,” said Mr. Minsky, adding that sponsors should permit terminated employees to pay off their loans.
Sponsors should encourage new employees to roll over assets from former employers' plans, Mr. Minsky said. Employers also should encourage employees to keep assets in the plan after they retire.
“There is a growing group of sponsors interested in retaining the assets,” he said. “It's better for the participants and better for the sponsors.” Participants benefit from lower institutional fees and sponsors benefit because more DC assets gives them more negotiating leverage with providers, he said.
Some recommendations would require new legislation or regulation. DCIIA wants to “reduce access to defined contribution balances by terminated participants,” the report said. “For example, instead of allowing cash-outs automatically upon termination, plans should restrict cash-outs to those in need, similar to hardship withdrawals.”
DCIIA also supports legislation that would eliminate the six-month contribution suspension imposed on participants who make a hardship withdrawal. At the very least, sponsors should automatically re-start a participant's contributions after the six-month suspension period, Mr. Minsky said.
