IMHO May 23, 2011

IMHO: Loan Arranging

The headlines last week were all about how new legislation had been introduced to cut down on the “leakage” from 401(k) plans. 
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That leakage, roughly defined as pulling money out of retirement savings before retirement, has been a concern of many for some time.  About once a year, someone puts out a report about the number of outstanding loans from these programs and/or the uptick in hardship withdrawals (see IMHO: Double Dipping); and, from 2008, see IMHO: Safety “Net”).  Not surprisingly, with the sluggish U.S. economy and the so-called jobless recovery, people seem to be dipping into these accounts at higher rates.  And yet, for all the hyperbole around such things, the actual rate seems to be pretty consistent (allowing for differences in the data samplings). 

That said, last week, Senators Herb Kohl (D-Wisconsin) and Mike Enzi (R-Wyoming) introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (the SEAL Act), which, among other things, was designed to “[limit] the most 401(k) loan practices that provide easy access to retirement funds but adds costs and fees to pension plans” (see “Legislation Aims to SEAL 401(k) ‘Leakage’”). 

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From the bill’s summary, the only real “limitation” on loans was capping the number outstanding at any one time to…three.  Beyond that, it gave participants longer to stave off having an outstanding loan turned into a “deemed distribution” (a euphemistic term for treating that loan you previously took out as a distribution and subjecting it to income taxation), and it allows participants to continue making contributions after taking a hardship (the current six-month restriction being a vestige of the sense that if you could afford to keep contributing after taking a hardship, you really weren’t in a hardship situation).  The SEAL act would ban 401(k) loan debit cards—but did anyone ever think THAT was a good idea?   

Now, I’m sure that keeping those repayment windows open longer will compound someone’s recordkeeping headaches, but it seems to me a reasonable means of giving participants time to restore that money to their retirement accounts, rather than simply forking over a big chunk of it to the IRS.  Moreover, I think we all know that a properly administered hardship request can alleviate the hardship without imposing a six-month “penalty” on retirement savings (and matching contributions).  As for “only” letting participants have three loans out at one time—well, IMHO, that’s hardly a limit at all. 

In fact, headlines notwithstanding, the bill might have been more accurately (if less acronymically melodic) titled the “Making It Easier for Participants To Repay Outstanding Loans and Keep Saving” bill. 

All in all, the legislation may or may not actually forestall 401(k) leakage, but IMHO, it’s certainly a plumber’s helper. 

Data & Research May 23, 2011

Whitepaper Claims Emotional Barriers Blocking Pursuit of Advice

A new white paper assets that emotional responses are keeping those in and near retirement from accessing professional investment help.  
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According to “Understanding the Accidental Investor: Baby Boomers on Retirement”, a whitepaper by advice provider and registered investment advisory firm Financial Engines, those retirement investors are uncertain about the future, fearful of poverty, not confident in their investing abilities, and distrustful of unscrupulous financial services and insurance firms. 

Regardless of the primary emotion, the white paper – based on over 300 interviews and surveys that Financial Engines conducted between 2008 and 2011 – reported that these emotions frequently created barriers that prevented participants from accessing professional help. Many participants that expressed those emotions simply avoided thinking about retirement altogether.  Participants that made statements that reflected a fear of poverty frequently engaged in what Financial Engines termed “magical thinking” – telling themselves that everything would work out in the end.

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Finally, those that were distrustful of financial services or unconfident about finances frequently turned to family and friends for advice, regardless of their qualifications or experience. 

Future “Tense?”

More than half of participants interviewed expressed some form of uncertainty in what the future may bring;

Nearly half had a fear of poverty in retirement;

Nearly half were distrustful of the motivations or qualifications of financial services and insurance firms; and

More than a third of near-retirees and retirees said that they did not feel confident or knowledgeable when it came to making important financial decisions. 

In addition to highlighting the emotions and corresponding behaviors of near-retirees and retirees, Financial Engines identified five common needs that, if met, could potentially help participants overcome these strong emotional barriers. Those needs include:

Help from an Adviser. Many participants said that they wanted to work with a financial professional they could trust to help them create a plan and decide on the appropriate course of action. At the same time many said that they found it difficult to know who to trust with their life savings, according to the report.

Sponsor Evaluation. According to Financial Engines’ white paper, participants said that having their employer select and monitor independent retirement income providers made them more likely to accept professional retirement help.

Fee Transparency. Finally, many participants demanded clear and easily understood fees. They said that they would not act unless they fully understood the fees associated with a given product or service.

Flexibility. Given the uncertainty of retirement, participants expressed a need to have flexibility and control over their retirement investments. According to the white paper, participants had a high reluctance to be locked into an investment vehicle—especially early in retirement when uncertainties are at their highest.

Safety. Due to fear of significant losses right before or in retirement, many participants wanted investments that lowered investment risk or that could provide a steady and reliable source of income over time, and potentially for life. Many participants desired both, according to the report, and many of the participants also wanted flexibility.

Copies of the “Understanding the Accidental Investor: Baby Boomers on Retirement” white paper are available for download free of charge at http://www.financialengines.com.

 

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