Financial Wellness Via Your 401(k) 

Coming to you from Boston, at the Society of Actuaries Annual Meeting.

In a prior post, “DC Plans, Can Everyone Win?” I shared my thoughts on whether American workers could adequately prepare for retirement, and generally speaking, I think most can.  

However, there is a group who may not succeed in a traditional 401(k) plan – workers who live paycheck to paycheck.  A plan sponsor can split workers into three groups: 

• Those who make retirement preparation a priority; 
• Those who do not make retirement preparation as a priority, but are focused on wealth accumulation, financial security, independence; and,
• Those who live paycheck to paycheck. 

It is that third group that we should be concerned about. The Federal Reserve Board of Governors confirms that approximately 40 percent of American households couldn’t come up with $400 to satisfy a financial emergency without borrowing money, taking a payday loan or pawning some possession (https://www.federalreserve.gov/publications/2017-economic-well-being-of-us-households-in-2016-economic-preparedness.htm). The American Payroll Association (APA) survey, Getting Paid in America, confirms this finding with more than 70 percent of survey respondents saying they would have some or great difficulty if their next paycheck were delayed one week (http://www.nationalpayrollweek.com/documents/2017GettinngPaidInAmericaSurveyResults.pdf). So, a sizeable minority has a real challenge. But the same APA survey shows that, even though 71 percent of the survey respondents live payday-to-payday, 85 percent or more of the respondents to the same survey said that they participate in an employer-sponsored savings plan where one is offered!
So, once we offer a plan, we’re in.  Or, are we? Those living paycheck to paycheck are probably your best customers when it comes to hardship withdrawals, loans and post-separation distributions. What can you do? 

Actions other employers have taken include one or more of the following provisions:

• Automatic enrollment, automatic escalation, etc. – which will prompt a savings decision by those associates who might think they cannot afford to participate.
• Flexible account consolidation/aggregation provisions – which may reduce leakage and prompt a greater willingness to save.  Allowing individuals to voluntarily consolidate retirement savings may reduce leakage -  you can facilitate a rollover of outstanding loans at the time of hire, you can accept rollovers while they are actively employed but not yet eligible, and/or you can accept a rollover from another employer-sponsored plan or IRA even after separation.    
• Eliminate hardship withdrawals – most plans offer access via hardship withdrawals.  However, next to post-separation distributions, hardship withdrawals are a leading cause of leakage.  Unfortunately, with only a few exceptions, a participant can’t repay a hardship withdrawal, the hardship withdrawal is subject to federal and state income taxes as well as a penalty tax, and the hardship withdrawal triggers a six-month suspension of participation – where workers can’t contribute, and cannot receive employer contributions.  So, if you retain hardship withdrawal provisions, you may want to ensure that your plan permits contributions in a significant percentage of pay (much more than double the percentage of pay that qualifies for the employer match).  For those taking a hardship withdrawal, they may want to ramp up their contributions after the six-month suspension, so that they can contribute enough so that if the plan has a true up provision, they can still receive the full employer financial support.  
• Add 21st century loan provisions – you can structure your plan loan provisions to incorporate a line-of-credit process to minimize paperwork.  To minimize the number of defaults, you might consider adding electronic banking functionality and conditioning the loan on receiving a pre-commitment to repay the loan – so that:  (1) loans can be repaid even after separation (electronically), and (2) former employees can avoid penalties and income taxes by taking a loan instead of a distribution.  
• Consider adopting Deemed IRA provisions - Let former employees continue to participate and contribute.

Encourage workers to save more than they are willing to earmark for retirement by providing them liquidity in the form of these tax-preferred, progressive loan capabilities. The formula can go like this:  Contribute more than you can afford to save for retirement, get the match, invest, accumulate, borrow to meet a near term need, continue contributing while you repay the loan and rebuild the account for a future, greater need. Repeat as necessary to and through retirement.  For me, I call it the “Bank of Jack.”  If your name is Sue, call it the “Bank of Sue.” 

In other words, the 401(k) can be a financial wellness solution.  (See The 401(k) as a Lifetime Financial Instrument.  https://www.soa.org/News-and-Publications/Publications/Essays/2017-financial-wellness-essay-collection.aspx

I’ve had a lot of success with that structure.  There are many more details how this structure can help even those workers living paycheck-to-paycheck to successfully prepare for retirement.  Check it out and let me know what you think.  [email protected]