PLANSPONSOR - July - August 2023 - 35

Portability Services Network, which
employers can use to transfer terminated
employee accounts to the person's new
employer plan. " You want to see these low
[account] balances preserved in the taxdeferred
system, if you can, " says David
Stinnett, principal in Vanguard strategic
retirement consulting, in Malvern, Pennsylvania.
" Any program that makes the
connection
between
those
left-behind
balances and any other plan that people
have moved on to is really important. "
The act's auto-portability provisions
are an example of where the industry identified
a problem, solved it, worked with the
DOL and Congress to realize a solution and
is now executing for a goal that is " 99% for
the betterment of the system, " Kreps says.
" I can't remember a time when there's
been that kind of industry-led coordination
among recordkeepers and the various
arms of the government. "
Avoid Cash Crunches
Sources unanimously cite the importance
of expanded auto-portability's potential
for reducing leakage when participants
change jobs. But they also stress the need
for participants to have access to sufficient
emergency funds and financial education
and say the act's provision for Roth-basis
emergency accounts address that need.
" The reason people are typically
pulling money out early from their retirement
plan, whether that's in the form of a
hardship or a loan or a cash-out, is because
[they] don't have enough saved for emergencies
or for short-term expenses, " says
Kirsten Hunter Peterson, vice-president,
thought leadership with Fidelity Investments
in Boston. " So, in many of those
cases, people might look to their retirement
account as their only source of savings. "
Hunter Peterson says, in Fidelity's
experience, the best way to stop leakage is
to encourage participants to accumulate
short-term savings. To that end, several
years ago the company rolled out a workplace
emergency savings account program.
" In many cases, these are sponsored by the
employer, so it's a short-term or emergency
savings account. But participants can use
[them] to save for short-term needs. "
Delta Air Lines has implemented the
Fidelity emergency savings program for
employees in conjunction with financial
education. The employees take an online
financial education course and complete
a series of one-on-one coaching sessions.
They then receive $750 from Delta to start
their emergency account, according to the
airline. Employees fund their account via
payroll deposits, but Delta additionally
" We see a
13% reduction
in the average
cash-out
percentage
when people
[can] take
partial withdrawals. "
matches
up to $250 and reimburses for
income tax incurred on its contributions so
employees net the full $1,000.
In another example, Commonwealth,
UPS and Voya collaborated through BlackRock's
Emergency Savings Initiative to
develop an emergency savings program
for UPS's nonunion employees, BlackRock
reports. The program uses the aftertax
option of the package delivery company's
401(k) plan, which is administered by
Voya, to hold the funds.
Plan Design Variables
SECURE 2.0's features, particularly autoportability,
likely will help reduce leakage,
but sponsors can take other steps, as well.
Rachel Weker, vice president, institutional
retirement marketing with T. Rowe Price
in Catonsville, Maryland, points out that
a plan's decision on whether participants
may have one or multiple loans outstanding
shows how plan design affects leakage.
Among plans that allow loans,
roughly 60% allow a single loan and about
40%, multiple loans, Weker says. T. Rowe
Price found that, in 2022, participants who
took multiple small loans had a saving rate
of 5.7%-2.3% percentage points below the
average saving rate of about 8.4%.
Another design factor to consider
is whether to permit partial withdrawals
versus having only an all-or-nothing cashout
option. " We see a 13% reduction in the
average cash-out percentage when people
[can] take partial withdrawals, " Weker says.
Poking New Holes?
Several SECURE provisions could potentially
increase leakage, however. For
example, participants may take up to
$1,000 in one withdrawal per year for an
emergency personal expense without an
early-withdrawal tax penalty. They may
optionally repay the amount borrowed in
three years; additional emergency loans
during the three years are restricted
pending repayment or subsequent plan
contributions. Domestic abuse victims
may take distributions without the 10%
early penalty tax up to the lesser of $10,000
or 50% of account value.
Both of these provisions allow selfcertification
of the claimed need. Additionally,
participants affected by natural
disasters may withdraw up to $22,000
to pay for disaster-related expenses.
It is difficult to predict whether these
provisions will increase leakage through
withdrawals. Stinnett says the in-service
hardship withdrawal rate among participants
has been steady in recent years
but increased from 2.1% in 2021 to 2.8%
last
year. The
self-certifying
$1,000
maximum withdrawal that SECURE 2.0
permits could make it a " little easier " to
take hardship withdrawals. He adds: " In
theory, if a plan adds that provision, you
might have to be comfortable with the
fact that people will avail themselves of
it, and that will lead to more leakage. "
-Ed McCarthy
PLANSPONSOR.COM July - August 2023 35
http://www.PLANSPONSOR.COM
PLANSPONSOR - July - August 2023

Table of Contents for the Digital Edition of PLANSPONSOR - July - August 2023
