The Defined Contribution Institutional Investment Association (DCIIA) report cites cash-outs and other pre-retirement distributions to be the most harmful elements of leakage from the defined contribution system. The group’s analysis, done in collaboration with the Employee Benefit Research Institute (EBRI), finds that 401(k) plan cash-outs can reduce the probability of participants successfully replacing most of their income in retirement within the 401(k) environment by more than 5 percentage points; for hardship withdrawals the reduction can be as high as nearly 3 percentage points.
In the report, DCIIA made the following recommendations for policymakers:
- Cashouts: Reduce access to defined contribution balances by terminated participants. For example, instead of allowing cash-outs automatically upon termination, plans should restrict cash-outs to those in need (similar to in-service hardship withdrawals).
- Hardship Withdrawals: Eliminate the six-month contribution suspension requirement for hardship withdrawals. This action may decrease the potential impact, especially given possible participant inertia when it comes to re-instating plan contributions.
- Loans: Implement limits on loan-taking and allow post-termination repayment of loans. While EBRI’s analysis finds that loans do not appear to have a meaningful negative impact, DCIIA believes that limits may be desirable to prevent defaults by participants upon termination. At a minimum, policymakers should encourage plan sponsors to permit post-termination repayment of loans.
Recommendations the group made for plan sponsors include:
- Actively promote the benefits of having plan sponsors encourage new employees to rollover existing balances from former employer's plans into their new employer's plan, possibly as part of the new hire orientation, and encourage ways to simplify and automate this process.
- Encourage retired employees to leave assets in the plan through communication efforts and through plan design (e.g., by allowing more flexibility around partial distributions).
- Facilitate rollovers by offering streamlined, online rollover options.
- Automatically restart contributions after the statutory six-month suspension period.
- Target communication messages to employees’ with hardship withdrawals to encourage restarting contributions in the plan.
- Reduce the number of loans allowed and/or restrict the available loan balance.
- Allow loan payments after termination.
The full report, “Plug the Drain: Leakage and the Impact on Retirement.” is available at http://www.dciia.org.