Benefits June 23, 2014

The Impact of Leakage on 401(k) Accumulations

June 23, 2014 (PLANSPONSOR.com) – A new analysis from the Employee Benefit Research Institute (EBRI) shows preretirement 401(k) account withdrawals often have a negative impact on long-term wealth accumulation.
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EBRI conducted the analysis of 401(k) plan leakage on behalf of the Department of Labor’s ERISA Advisory Council, finding leakage due to preretirement access to 401(k) savings by workers through loans, hardship withdrawals or cash payout at job changes can significantly damage an individual’s retirement readiness by age 65.

Utilizing the institute’s proprietary Retirement Income Projection Security Model (RSPM), EBRI researchers show that the combined impact of the three primary types of 401(k) leakage reduces the probability of an individual reaching an 80% real income replacement rate (including Social Security benefits) by 8.8% for the lowest-income quartile and 7.0% for those in the highest-income quartile. However, the analysis also shows that approximately two-thirds of the leakage impact is associated with cashouts that sometimes occur at job change, rather than loans or hardship withdrawals.

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Despite the clear and negative impact of leakage on long-term retirement readiness, EBRI says it’s far from clear that cutting off participant access to hardship withdrawals or loans would improve outcomes.

As EBRI Research Director Jack VanDerhei explains, “It’s one thing to quantify the impact of not allowing early access to these funds—and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes.” For example, participants may be forced to reduce ongoing contributions to 401(k) accounts if not permitted to take a loan, potentially offsetting some or all of the prospective gains realized by restricting participant access to retirement funds.

“This analysis needs to be accompanied by a very strong caveat that there are clear data gaps that will need to be filled,” VanDerhei adds. “For example, we have found in previous research that participants in plans with a loan option have higher contribution rates than those without such access, and a similar relationship may exist with respect to the availability of hardship withdrawals.”

EBRI says removing or restricting these plan options would likely reduce levels of 401(k) participation or access, and that could result in a significant drop in retirement savings for some employees eligible for participation in a 401(k) plan.

Results of EBRI’s leakage modeling were presented by VanDerhei at a June 17 hearing of the ERISA Advisory Council at the U.S. Department of Labor. His full testimony on the impact of leakages on 401(k) accumulations at retirement age is online at www.ebri.org/pdf/publications/testimony/T-180.pdf.

Compliance June 23, 2014

Proposed FMLA Changes Would Expand Spouse Definition

June 23, 2014 (PLANSPONSOR.com) – The Department of Labor (DOL) is looking at expanding the protections of the Family and Medical Leave Act (FMLA) to cover eligible employees in same-sex marriages.
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The DOL plans to publish a Notice of Proposed Rulemaking that would revise the definition of spouse under the FMLA to better conform with the U.S. Supreme Court decision in United States v. Windsor, which expanded the definition of the term spouse to include same-sex couples (see “Benefit Changes Ahead After DOMA Ruling”).

The proposed update to the FMLA would shift from a “state of residence” rule to a “place of celebration rule” (i.e., based on where the marriage was entered into). The revised definition of spouse would include same-sex marriages, as well as common law marriages. Currently, the FMLA’s definition of spouse only applies to same-sex spouses who reside in a state that recognizes same-sex marriage.

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The specific wording for the revised definition would be as follows:

“Spouse, as defined in the statute, means a husband or wife. For purposes of this definition, husband or wife refers to the other person with whom an individual entered into marriage as defined or recognized under state law for purposes of marriage in the state in which the marriage was entered into or, in the case of a marriage entered into outside of any state, if the marriage is valid in the place where entered into and could have been entered into in at least one state. This definition includes an individual in a same-sex or common law marriage that either (1) was entered into in a state that recognizes such marriages or, (2) if entered into outside of any state, is valid in the place where entered into and could have been entered into in at least one state.”

The FMLA, enacted in 1993, entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons. Employees are, for example, entitled to take FMLA leave to care for a spouse who has a serious health condition.

“The basic promise of the FMLA is that no one should have to choose between succeeding at work and being a loving family caregiver,” says U.S. Secretary of Labor Thomas E. Perez. “Under the proposed revisions, the FMLA will be applied to all families equally, enabling individuals in same-sex marriages to fully exercise their rights and fulfill their responsibilities to their families.”

In terms of FMLA leave usage, the revised definition of spouse would allow eligible employees, regardless of where they live, to:

  • Take FMLA leave to care for their same-sex spouse with a serious health condition;
  • Take qualifying exigency leave due to their same-sex spouse’s covered military service; or
  • Take military caregiver leave for their same-sex spouse.

The revised definition would also entitle eligible employees to take FMLA leave to care for their stepchild, even if the in loco parentis requirement for providing day-to-day care of financial support is not met. In addition, the new definition of spouse would entitle eligible employees to take FMLA leave to care for their stepparent, even though the stepparent never stood in loco parentis to the employee.

The proposed rule will be posted at http://www.regulations.gov, where it can be found by using the regulation identification number 1235-AA09. Comments can be submitted via the site and must be received within 45 days following publication of the proposed rule in the Federal Register.

More information about the proposed rule can be found here.

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