BofA: Hardship Withdrawals Up 36% As More Prioritize Short-Term Needs

Distributions were down and hardship withdrawals were up, though overall saving rates remained steady, according to the bank’s latest participant research.

Bank of America retirement plan participants’ hardship withdrawals rose 36% year-over-year in Q2 to 0.52% of participants, according to the bank and recordkeeper’s latest participant analysis.

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“This year, more employees are understandably prioritizing short-term expenses over long-term saving,” Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, said in a statement. “However, it’s critical that employees continue to invest in life’s biggest expense – retirement.” 

In research mining the data of more than 3 million retirement participants released Tuesday, Bank of America found borrowing from workplace plans and hardship withdrawals were both higher this year.

“Regarding the increase in hardships, the economic environment, which has seen higher rates of inflation and cost of living, could certainly be a contributing factor,” Lisa Margeson, Bank of America’s managing director of external affairs for retirement research and insights, said via email. “That said, although the increase in participants taking a hardship seems large, it is still only 0.5% of the total number of 401(k) plan participants.”

Participants also contributed 23% less to retirement plans on average in the year’s second quarter as compared to Q1, the average contribution rate in Q2 was $1,460, down from $1,880 in Q1. While lower for the year, the contribution rate was in line with the same quarter in 2022, which had an average of $1,440.

“There are several factors driving lower dollar contributions, even as savings rates remained consistent,” Margeson wrote. “The 2023 second quarter contribution amount was in line with the same time period last year, so the drop from first quarter may have been influenced by younger participants—presumably with lower salaries—joining plans, as well as the first quarter often being a time when bonuses are awarded.”

On the plus side, the research found that average 401(k) balances were up 9.6% from the end of 2022 to $7,250. In addition, more participants increased their contribution rate than decreased it (10.2% vs. 2.2%) in Q2, led by Generation Z and Millennial employees (19.3% vs. 2.6% and 11% vs. 2.6%, respectively).

“The data from our report tells two stories—one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” said Sabbia in a statement.

The bank also revealed findings of about 1 million health savings accounts and financial wellness measures, categories it added to the research this quarter to take a more “holistic look at confidence around financial preparedness,” according to the release.

Through the analysis, the bank found that HSA account balances rose 12% in the first six months of 2022 to $4,397 from $3,931.

The researchers also found that 38% of HSA account holders contributed more than they withdrew year-to-date through Q2, consistent with Q4 2022.

Meanwhile, 72% of HSA account holders used those accounts for health care expenses, and 27% plan to save for the future—a slight increase from the end of 2022, when 24% of account holders intended to maintain the account as savings.

Finally, the bank found a decline in feelings of financial wellness among participants. Out of a possible 100 points, the average financial wellness score for employees was 56, down one point from 57 at year-end. Women trailed men in the category, clocking in with an average score of 52, compared to 59 for men.

New 401(k) Litigators Use ‘More Credible’ Tactics in First Half of ‘23

Euclid Fiduciary’s mid-year litigation report finds fewer filings, as plaintiff law firms catch up on ’22, but new entrants using more accurate fee and service benchmarking.

Excessive plan fee and imprudent plan management litigation was lower in the first half of 2023 than it was last year, but plaintiff law firms also appear to be getting smarter in their arguments, according to analysis from Euclid Fiduciary.

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There were 21 excessive fee and fiduciary imprudence cases in the first half of 2023, far off the 89 filed for the full year 2022, according to the fiduciary insurance underwriter. The firm forecasts 45 filings this year overall, almost 50% off last year’s pace.

But the smaller case load is more indicative of plaintiff law firms catching up with a robust 2022 than of an easing of future litigation, says Daniel Aronowitz, the managing principal in Euclid Fiduciary.

“The number of cases are down as the big firms are digesting their cases,” Aronowitz says.

This year’s slowdown is “likely temporary,” he says, noting in his mid-year analysis that there continue to be demands from plaintiff firms for plan administration information, many of which “turn into lawsuits.”

Excess Fee and Investment Imprudence Lawsuits by Year

2023 projected
45
2023
21
2022
89
2021
60
2020
101
2019
35
2018
22
2017
51
2016
56
Source: Euclid Fiduciary

Overall, Aronowitz says the trend toward excessive fee cases, which have been dominating plaintiff filings in recent years, does appear to be dwindling, with a shift toward investment underperformance claims. Among new claims, trends include claims about providers making income from plan participant assets and allegations of imprudence resulting from providers choosing investment funds in the wrong share class.

2023 Excess Fee and Investment Imprudence Claims, by Type

Excessive RK fees
13
Excessive investment fees
10
Imprudent investment claims
13
Wrong share class
9
High fee / Underperformance of active TDFs
5
Excess float income
5
Proprietary funds
3
Excessive managed account fees
1
Other (self-dealing)
1
Source: Euclid Fiduciary

New Entrants

While the overall slowdown was not surprising, Aronowitz says, given the raft of complaints filed in 2022, the more interesting development is that two new plaintiff law firm entrants, Wenzel Fenton Cabassa PC and Christina Humphrey Law PC, have been making more “thoughtful” arguments.

“Whereas many historical excess fee filings have used artificially inflated fee data and misleading comparisons, these new firms assert somewhat more credible recordkeeping fee claims based on plan services, and some complaints even include participant fee disclosures with accurate fees charged to participants,” Aronowitz wrote in his analysis.

Many excess fee complaints base their case on Form 5500 filings, dividing plan size by number of participants, which Aronowitz argues is often “inflated or just plain wrong.” Firms Wenzel and Christina Humphrey, meanwhile, filed complaints using participant fee disclosures, which he writes are more accurate.

“We consider this historic for the excess fee genre, as most law firms pretend that there is some kind of mystery as to what participants pay for recordkeeping,” he wrote.

The plaintiff law firms are also introducing “new theories of liability” that allege imprudence against plan sponsors who do not monitor interest float and other indirect income being made by recordkeepers, Aronowitz wrote.

The first float claims were included in four complaints by Wenzel Fenton, then copied by another law firm, he notes. In Barner v. McLane Co. Inc., the plaintiff alleges that investment firm Merrill Lynch allowed participant deposits or money withdrawn from the plan from individual accounts to first pass through a Merrill clearing account, with Merrill allegedly being able to keep “millions of dollars” from investment earnings and interest.

Meanwhile, eight complaints, including four from the Christina Humphrey law firm, focus on whether plan sponsors are providing the lowest-fee share classes in plans.

“Plaintiff firms know that share class claims are the most difficult claims to dismiss at the pleading stage and will remain a staple of excessive investment fee claims,” Aronowitz wrote.

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