Page 168 - FebDefComp

News & Views | Q1 2020 Page 3 of 4

PLAN LEAKAGE

Federal Law encourages workers to save for their retirement by allowing employers to offer tax deferred savings plans. The law
also allows workers to withdraw funds from their accounts while they are still employed, under certain circumstances. While
early access to retirement savings has been shown to encourage participation, such in-service withdrawals, and pre-retirement
withdrawals upon separation from service, can easily derail a participant’s retirement readiness.

What is Plan Leakage? Withdrawals for other than retirement purposes are known as “plan leakage’, and strategies to minimize
plan leakage should be on the radar of plan sponsors. Typical examples of plan leakage distributions are unforeseeable
emergency withdrawals, plan loans (particularly where plans allow multiple loans, or when participants take loans repeatedly
throughout their career), plan loan defaults, and post-employment withdrawals taken before retirement age.

In 2013 (the most recent year for which complete data is available) the Government Accountability Office (GAO) found that
plans held retirement savings investments work nearly $17 trillion*. From these investments, approximately $70 billion* was
withdrawn for purposes other than retirement, by individuals in their prime working years (age 25-55). Nearly $40 billion* were
early withdrawals - monies taken before retirement age - and approximately $30 billion* was withdrawn for hardships, lump sum
cash-outs at separation, and unpaid loan balances. The early withdrawals ($40 billion) exceeded the amounts workers had saved in
that year.

Why should a plan sponsor care? An employer’s and plan sponsor’s primary responsibility is to design a plan with a focus
on the best interests of their participants and their beneficiaries. In doing so, you take great care to offer a strong investment
lineup, robust participant services, and a variety of options that help employees save towards a secure retirement. Withdrawals
for purposes other than retirement income - plan leakage - can detrimentally affect a participant’s long-term retirement security.
These withdrawals will reduce assets, inhibit growth, and may increase the participant’s taxable income. Moreover, plan leakage
can drain assets in your plan, thereby reducing plan asset size and average account balances, and potentially reducing your
plan’s overall buying power.
What strategies can a plan sponsor implement to minimize plan leakage? In order to reduce potential negative impact to the
plan, sponsors can take a few simple steps:
• Make sure terminating employees understand their options: they can leave their money in the plan, or they can transfer their
money to other allowable plans at any time.

• Limit the number of emergency withdrawals in a given time period.
• Allow contributions to resume automatically after the end of any suspension period.

• Consider limiting the number and amount of loans. Many plans allow participants to have only one loan at a time, but some
plans allow as many as five.

• Allow contributions to resume automatically once loans are repaid.

• Look at your loan origination fee. A recent study found that the average outstanding loan balance was $4,600 higher for loans
charging a $50 fee, than for loans charging $100.

• Limit non-real estate loans to a short repayment period (less than 5 years). Second, review plan leakage activity to determine
if there are any trends, e.g., multiple emergency withdrawal requests by a single participant.

In addition to the action steps described above, plan sponsors can also target educational messages to help employees
understand the downsides of early withdrawals, including taxation, the loss of tax-advantaged growth, and reduced retirement
income. Education about the need for and how to establish an emergency fund may also be in order. If your organization offers a
financial wellness program, these elements could easily be added.
Your NFP advisor is available to help you strategize about how to minimize plan leakage. If you are interested in reading the full
GAO report, click here.

*The figures in the GAO report includes retirement savings for 401(k) and IRA accounts only. The concepts and solutions in this article
are, however, applicable to all supplemental retirement savings plans.