Client Service

Provider Call Centers Aim to Educate About Hardships and Alternatives

Some providers train call center staff to educate participants about the implications of taking a hardship and other options.

By Javier Simon | August 10, 2017
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Under federal regulations, some plans allow participants to take out hardship withdrawals from their defined contribution (DC) plans to pay for immediate and heavy financial needs. These include tuition bills for their children.

Sue Unvarsky, chief operating officer at Prudential Financial, tells PLANADVISER that’s why participants’ demands for hardship withdrawals and call center volume tend to peak around August when these bills are reaching parents’ homes. Jack Schumaker of Fidelity Investments says the company’s call centers see similar patterns in the summer time. This potentially means that right now, thousands of working Americans across the country can be putting serious strains on their future retirement savings. Schumaker says that in the last 12 months ending June 30, about 2.2% of the firm’s 15.1 million 401(k) participants took out a hardship withdrawal.

He adds that around this time, staff at Fidelity’s call centers undergo reinforcement training and heavier staffing to not only deal with the expected hike in call volume, but also to ensure participants are being guided through all their choices and given information about the implications of each.

“Our obligation is to educate participants about their options whether it’s a loan, a hardship withdrawal or another option outside their 401(k) plan,” explains Schumaker. “From there, we will get into helping the participant explicitly understand what the ramifications of the decision will be.”

For example, a hardship withdrawal rarely comes at the sticker price. Hardship withdrawals are subject to income tax and an additional 10% tax on the amount taken out if distributed before the age of 59-and-a-half. Employees are also barred from making elective deferrals to the plan for at least six months after the hardship distribution. However, a bill addressing withdrawals has been introduced to reverse the latter. 

Unvarsky says one of the biggest downsides to taking out a hardship withdrawal is that it diminishes a participant’s ability to make the most out of compounding earnings. Moreover, it’s often difficult for a participant to put the amount of money withdrawn back in the plan.

“If I took out a $50,000 hardship withdrawal, it decreases my final savings by roughly $100,000 over the next 12 years assuming a 6% return on earnings,” explains Unvarsky. “If I’m in my mid-40s when I do that, I may not retire for another 25 years.”

While Unvarsky says she’s seen hardship withdrawals as little as $2,000, she has seen some reach above $40,000. Schumaker says the average amount withdrawn as hardship distributions from 401(k) accounts served by Fidelity in the last 12 months ending June 30 was $5,730. On average, this accounted for 21.9% of a person’s 401(k) balance.  

However, there are alternatives to taking a hardship withdrawal from DC plans to pay for higher education expenses.

NEXT: Finding Alternatives