PLANSPONSOR - June/July 2019 - 15

Hardship Withdrawals Spike
THE Bipartisan Budget Act of 2018 has
simplified the taking of hardship withdrawals
from a 401(k) or similar taxqualified
retirement plan and, a year and
a half since its passage, the results are
coming in.
Unlike in the past, participants
no longer need to exhaust any available
loan from the plan before qualifying
for a hardship withdrawal. And
they are no longer penalized by the safe
harbor requirement that, for six months,
prevented them from contributing to
their 401(k) while regulators decided the
legitimacy of their request-i.e., was the
money necessary to satisfy an immediate
and heavy financial need?
Evidence is emerging that this change
in the law has caused a significant spike in
hardship withdrawals. According to Kevin
Barry, president of workplace investing at
Fidelity, the number of such withdrawals
taken in the first months of this year
jumped 40% over the previous year. At
the same time, the rate of retirement plan
participants taking loans fell 7%.
" This is a trend we were afraid we
would see when the law was passed, "
he says. He also observes that the trend
" makes sense. ... The law changed the
rules for 401(k) loans and hardship withdrawals,
making it easier to draw the
money directly as a hardship without first
getting involved in the loan process. As a
result of this change in incentives, we've
seen a clear shift. " Considering the size
of that shift in terms of hardship withdrawals,
he says, " This is a big issue. "
While correlation does not equal
causation, it should be noted how the trend
of greater claiming of hardships comes at
a time when the economy and job market
are healthy. And, in Barry's assessment,
the drop in the rate of participants taking
loans is in itself demonstrative.
He also points out that the law was
ESOPs Can Multiply Retirement
Plan Savings
n Workers with a retirement plan plus an employee stock ownership plan
n Workers with a retirement plan only
$170,326
$80,339
$55,526
Average retirement plan
balance in 2018
Source: National Center for Employee Ownership
$22,447
Average retirement plan balance
with <$26k salary in 2018
changed with good intentions, relating
to the hurricane disasters of recent years
and the need for millions of Americans to
access liquid funds.
" Moving forward, this is a topic
we're looking at closely, and we're already
talking to many of our clients about
doing education or even addressing this
challenge through plan design changes, "
TALKING POINTS
The Up-Side of 'Volatility'
" It's one of those words that in a strict,
technical sense is neutral, but nonetheless
it gets a bad rap. ... Did your car fire right
up this morning? That's because the stuff
in the tank is volatile. The 401(k) account
doubled over the last decade? That, too,
was volatility in action. "
Source: Elle Switzer, " How Investors Can Take Control of Volatility "
Barry says. " The jump in hardship withdrawals
shows us that choice architecture
and incentives really matter. At
the end of the day, yes, there are going
to be people who need to access hardship
withdrawals. But we know there are
also people who could be well-suited for
taking a loan, rather than a hardship. "
-John Manganaro
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