PLANSPONSOR - August/September 2018 - 19

Helping to Build Emergency Savings
EVERY dollar leaked from a retirement
account today loses interest that would
have accrued from here on. Yet, according
to responses to the 2017 PLANSPONSOR
Defined Contribution (DC) Survey, on
average, 13% of DC plan participants
have outstanding loans, and 31% of plan
sponsors let participants take two at a time.
Stephen Utkus, principal and director
at the Vanguard Center for Retirement
Research and the Pension Research
Council, says nearly 40% of Americans
with 401(k) accounts have borrowed
against them over the last five years, while
defaults on these loans create an estimated
$6 billion in annual leakage from the
retirement savings system.
When retirement plan participants
have a source of emergency savings,
however, they are less apt to dip into their
retirement accounts, experts say.
One such source is the sidecar
account. " These accounts, also known as
emergency savings funds or rainy-day fund
accounts, are designed to allow participants
to meet short-term financial needs
that retirement plans aren't designed to
address, " says Michael Knowling, head of
client relations and business development
for Prudential Retirement.
The employer sets up the account
either within the retirement plan, as a
sidecar connected to the plan, or totally
separate from the plan, and establishes an
after-tax contribution source; the worker
then contributes up to a certain threshold-
e.g., $1,000 to $1,500-through payroll
deductions. Once his savings reach the
threshold, future contributions shift to
his formal retirement plan.
David Mitchell, associate director for
policy and market solutions at the Aspen
Institute Financial Security Program, a
nonprofit think tank, explains, " To ensure
a constant savings buffer, the short-term
account is automatically replenished,
as necessary. The hope is that ... savers
would be in a better position to distinguish
between what is available now and
what is locked away for retirement. "
" Plan sponsors have some flexibility, "
observes Knowling, if they decide to make
contributions to the account. " If you have
matching funds, you may incent people
who aren't even in the plan to join. And
the discretionary piece allows plan sponsors,
for instance, to make a one-time
TALKING POINT
Top Two Barriers to Retirement
Saving, by Industry
n n n n n n n n n n n n n n n
Too much
debt
Office and
administrative support
Food preparation and
serving
Transportation and
material moving
Production
Education, training
and library
Health care practitioners
and technical
Construction and
extraction
Installation and repair/
Building and grounds
Personal care
Protective services
Engineering
Source: Indexed Annuity Leadership Council
14%
23%
22%
28%
32%
32%
30%
32%
24%
22%
24%
22%
32%
n n n n n n n n n n n n n n n
High daily
living expenses
24%
32%
26%
31%
25%
31%
26%
n n n n n n n n n n n n nn n
Employer does not
offer a retirement plan
27%
38%
discretionary contribution.
" If the fund is part of the plan, " he
continues, " it's important for the sponsor
to have a full discussion with its recordkeeper,
from a nondiscrimination perspective.
An analysis upfront of the [fund's]
impact on nondiscrimination testing may
guide the employer to decide whether it
should or should not make contributions
to the account. " -Judy Faust Hartnett
PLANSPONSOR.com August-September 2018 19
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PLANSPONSOR - August/September 2018

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