Mitigating Factors

Many lawmakers and retirement plan industry executives have recently been focusing on how to stem the leakage that can happen when participants take out loans or make withdrawals from their 401(k) accounts. Plans sometimes include design features that attempt to discourage or limit such practices, so we wanted to take a look at how prevalent—and effective—those features are. We turned to our 2014 PLANSPONSOR Defined Contribution (DC) Survey for the data.

Small plans do the least. More than half of the surveyed plans with less than $1 million in assets have no leakage mitigation strategy in place, meaning they impose no limits on loan quantity or amount; nor do they otherwise deter or restrict loans or pre-retirement withdrawals. By contrast, about 91% of the plans with more than $5 million in assets have at least one program in place that helps to discourage loans or withdrawals.

Advisers make a difference. Advisers do appear to have a material impact on the adoption of anti-leakage strategies for plans. The incidence of plans having at least one of these jumps from 77% to 86% when a plan adviser is used. However, just 14% of plans using advisers have no leakage prevention strategies, versus 23% of plans that do not use advisers.

More limits do not necessarily help. The average percentage of participants taking loans (16%) is actually the highest when plans cap both the number of loans and the loan amounts; in fact, it is higher than for plans that have taken no action at all (12%). In this case, it is possible that certain plan sponsors with higher than average rates of outstanding loans and/or withdrawals are being proactive. Or perhaps limits actually leave participants with the impression it is all right to take some sort of loan, but not to overdo it by taking large or multiple loans.