Plugging DC Plan Leaks

Plan sponsors can go a long way toward reducing leakage from defined contribution (DC) retirement plans.

This can be achieved by taking a few pre-emptive steps, an Aon Hewitt white paper found, especially when leakage is the result of outstanding and defaulted loans borrowed against plan assets. Those steps include:

  1. Adding direct debit loan repayment options;
  2. Reducing the number of loans available to participants;
  3. Limiting loan dollars to those contributed to plan funds by the employee; and
  4. Increasing loan origination fees.

The impact of these changes can be dramatic. Employers that have a direct debit loan repayment option, for example, see 22% fewer defaults than those that do not offer this option.

Another telling figure from the study: Plan sponsors that allow participants to have only one outstanding loan at a time report loan balances that are $1,600 less, on average, than the balances among sponsors whose plan participants can draw two or more loans.

Companies that prohibit loans on employer-provided dollars in retirement plans see $370 less in average outstanding loan balances compared with companies that allow employees to borrow dollars paid in as matching contributions.

And the most effective way to cut down on leakage and outstanding loan dollars? Charge more in loan initiation fees. According to the study, the average outstanding balance of loans that charged an origination fee of $50 or less is $4,600-plus higher than the average outstanding balance of loans that charged $100 or more.

A full copy of the survey and details about its methodology can be found here.