Articles

Help Your Clients Put a Plug on Retirement Plan Leakage

Mar 18, 2022

The ability to access retirement savings in a financial emergency is a safety net that many employers want to provide for their employees. But most employers also want to strike a careful balance so that early access to retirement savings – referred to as plan leakage – doesn’t harm their employees’ chances of accumulating adequate retirement savings. Plan leakage can occur in the form of:

  • Distributions when workers change jobs and don’t roll over their savings to another employer plan or an IRA
  • Plan loans that are defaulted and never paid back
  • In-service and hardship distributions

One study estimated that 22% of net contributions made by workers aged 50 or younger leaks out of the retirement savings system each year.1 As a financial advisor, you can help* your clients evaluate their plan’s level of leakage by evaluating plan data such as:

  • Total number of hardship distributions processed
  • Number of participants who took hardship distributions and the average dollar amount taken
  • Total number of loans and dollar amount of original loan process
  • Number of participants with outstanding loans and average dollar amount of outstanding loan
  • Number of defaulted loans, both number of participants and total dollars
  • Participants who terminated service and took lump sum distributions rather than requesting a direct rollover

Plan sponsors may want to measure metrics over several plan years rather than just the last year or two if a substantial portion of the workforce was financially affected by the COVID pandemic or a recent natural disaster.

Strategies to help decrease plan leakage

If the plan metrics reveal that plan leakage is higher than the plan sponsor wants for their employees, they may want to assess whether allowing employees to access their retirement savings while employed is still aligned with their plan objectives. There are several strategies financial advisors can help plan sponsors explore to reduce leakage from their plan.

Plan design

  • Options to reduce the likelihood of loan defaults, such as setting a limit on the number of outstanding loans at a time, allowing only one loan per year and setting a minimum loan amount
  • Options to reduce the likelihood of hardship distributions, such as allowing only one hardship distribution per year or reducing the sources available for hardship distributions
  • Offering an emergency savings account associated with payroll deduction to help participants better prepare to manage a financial emergency

Employee education

  • On the benefits of long-term saving and investing, and on the cumulative impact of even small distributions from retirement accounts
  • On the tax and penalty consequences associated with hardship distributions, defaulted loans, and distributions before age 59½
  • On rollover options and tax and withholding consequences of distributions and rollovers
  • On the rollover process and forms necessary to move plan balances to a new employer’s plan or an IRA

You can help your clients establish metrics for measuring the level of leakage from their plan and introduce plan design options, educational programs, and other strategies that may help reduce plan leakage.
 

1 Joint Committee on Taxation, Estimating Leakage from Retirement Savings Accounts (JCX-20-21), April 26, 2021, www.jct.gov 

* This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own tax, legal and accounting advisors before making any decisions. Newport and its affiliates do not provide tax, legal or accounting advice.
 
Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services.


20220222-2045394

 

Copyright © 2015-2022 Newport Group, Inc.  All rights reserved.
Unauthorized access is prohibited. This site is designed for U.S. residents only.

Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. 

Investment Advisory and fiduciary consulting services are offered through Newport Group Consulting, LLC, a registered investment adviser. Securities are offered through Newport Group Securities, Inc., a dually-registered investment advisor and broker dealer, member FINRA. Securities in California are offered through Newport Securities Insurance Services. For more information about Newport Group Consulting and its services, Newport Group Securities, Inc. or Newport Securities Insurance Services and services offered, please refer to our Form ADV Part 2, which is available by contacting us at 407-333-2905, visit our website at www.newportgroup.com, or advisorinfo.sec.gov.  

Newport Trust Company is a New Hampshire state-chartered trust company Newport Trust Company provides independent fiduciary and trustee services for employee benefit plans.

Newport Group Consulting, LLC, Newport Group Securities, Inc., and Newport Trust Company are subsidiaries of Newport Group, Inc., an Ascensus Company.