Loosened rules at odds with efforts to cut loans, hardship withdrawals

Even as lawmakers loosened restrictions on hardship withdrawals for retirement plan participants, defined contribution plan executives and their service providers are continuing to look for ways to reduce the effects of loans and withdrawals on participants' projected retirement incomes.

Signed by President Donald Trump on Feb. 9, the 2018 Bipartisan Budget Act eased restrictions on hardship withdrawals for retirement plan participants.

The measure removed the requirement that participants who take hardship withdrawals cannot contribute to their retirement plans for six months and it eliminated the requirement that participants have to take a loan before taking a hardship withdrawal from their contributions to their accounts.

It also lifted restrictions on taking hardship withdrawals from qualified non-elective employer contributions, qualified matching contributions, and any earnings resulting from both the employer and employee contributions.

The issue of plan leakage through loans and withdrawals is not a new problem.

However, the new provisions in the federal budget law, which are optional provisions, have given plan executives another reason to examine the issue.

Based on an analysis of 15 million participants among clients of Fidelity Investments, 2.3% of participants made hardship withdrawals in 2017. Over the same period, 10% of participants initiated loans, and 21% had loans outstanding, showed data provided by Fidelity spokesman Michael Shamrell. For 2012, Fidelity reported slightly higher percentages — 2.4% of 11.9 million participants analyzed made hardship withdrawals, 10.9% initiated loans and 22.8% had loans outstanding.

While the implications of the new hardship withdrawal provisions are still being assessed by many plan sponsors, retirement officials at companies like Movement Mortgage LLC and Oncor Electric Delivery Co. are working in the meantime to ensure employees are making informed decisions about withdrawals and loans, and not jeopardizing their retirement nest eggs.

To discourage frequent loan usage within Movement Mortgage's $84 million 401(k) plan, the company, revised its loan policy, effective Jan. 1, to limit the number of loans employees can take to two in any given year (including no more than one loan outstanding at any time) and raise the minimum loan size to $1,000 from $500 previously, said Aimee Dodson, thrive director, based in Indian Land, S.C. Participants were already limited to one loan outstanding prior to Jan. 1, but there was no limit on the number of loans they could take annually.

Additionally, employees requesting loans or withdrawals — both hardship and non-hardship — are required to consult with planners from financial education company Financial Finesse, Ms. Dodson said.

One of the goals of those conversations is to examine whether other options exist besides tapping into the 401(k) plan assets, she said.

The company's Love Works fund, a grant program for employees in need, is one option, Ms. Dodson said. The program is funded by employee and company contributions.

After learning in 2015 that about 30% of participants in Oncor's more than $700 million 401(k) plan had taken loans or withdrawals (hardship and non-hardship) in the prior 12 months, compared to 19% of participants at similarly sized plans, officials launched a campaign to help educate participants on the pros and cons of tapping into retirement accounts prematurely, said Brett Powell, Dallas-based manager of benefits, pension and thrift.

Their efforts ranged from:

• sending postcards to participants with multiple withdrawals over the past couple of years, which illustrated the tax implications and fees associated with early withdrawals from retirement accounts,


• posting educational videos and articles on the company's plan website about loans and withdrawals,


• hosting workshops and one-on-one sessions with the plan's record keeper, Fidelity.

There were no changes to the plan's loan or withdrawal polices.

"We weren't trying to necessarily stop anyone from taking (withdrawals) ... but it was more about making sure (participants) were educated as to the pros and cons," Mr. Powell said. As of October, the percentage of participants with loans or withdrawals was 24%, Mr. Powell said, adding that loans and withdrawals are expected to remain part of the conversation in future participant workshops.

Mr. Powell said plan officials expect to discuss the federal budget's new provisions on hardship withdrawals with Fidelity in May.

Since discovering that one of its record-keeping clients — a Midwestern trucking company with 3,000 employees — was receiving many requests for loans and hardship withdrawals, MassMutal Financial Group has been working with the company over the past year to set up a rainy day/emergency fund for employees. The hope is that participants would tap into that rainy day fund in times of need, rather than retirement savings, said Josh Mermelstein, Enfield, Conn.-based head of retirement readiness at MassMutual.

Mr. Mermelstein declined to identify the company or provide details about it.

Aside from providing plan executives data on loan and withdrawal activity within their plans, Mr. Mermelstein said MassMutual has been illustrating the impact of those behaviors on workers' retirement readiness. For example, according to MassMutual's analysis, a 29-year-old employee who is on track to retire at age 65 but then takes a hardship withdrawal reduces his or her retirement readiness by 20% on average, the firm said in a December news release on its analytic capabilities. Plan-specific projections can also be provided with plan executives' help, Mr. Mermelstein said

"Everyone has been worried about getting money into retirement plans for decades, and now they're seeing that we should be just as focused on money going out of retirement plans" said Veronica Charcalla, Woodbridge N.J.-based vice president, retirement participant services, at Prudential Retirement.

Ultimately, "we want to strike a good balance between giving (employees) access to their funds ... but also educating them on really taking only what they need and ensuring quicker payback periods if it's a loan and going through some of implications of taking the money out," she said.

One area Prudential and its clients have been focused on is developing holistic financial wellness programs that encourage activities like budgeting and saving for emergencies, so employees have fewer reasons to take money out of their retirement accounts early, Ms. Charcalla said.

Like Prudential, T. Rowe Price has focused on providing clients' plan participants with tools to pay down debt, build an emergency savings fund and shore up their overall financial foundation, so they do not need to take loans or withdrawals from their retirement plans, said Rachel Weker, vice president of T. Rowe Price Retirement Plan Services Inc. and senior manager in investment platforms and services, in Baltimore.

Among those tools are the services of DoubleNet Pay Inc., which allows employees to automatically allocate funds from their checking accounts to things like emergency savings accounts, and SmartDollar, an educational program that teaches participants how to get their financial houses in order.

T. Rowe Price participants also have access to a loan impact calculator where they can enter information, including salary, planned retirement age and loan information, to see the potential impact of that loan on retirement savings, said company spokeswoman Nadine Youssef in an email.