Benefits August 1, 2011

Plan Leakage Can Derail Workers’ Retirement Savings

August 1, 2011 (PLANSPONSOR.com) - A new research report from the Defined Contribution Institutional Investment Association (DCIIA) finds that plan leakage can reduce by more than 14 percentage points the probability that low-wage participants will successfully be able to replace at least 80% of their income in retirement after 31-40 years of plan eligibility.
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The DCIIA research report identifies cash outs and other pre-retirement distributions to be the most harmful elements of leakage from the defined contribution system. The group’s analysis, done in collaboration with the Employee Benefit Research Institute (EBRI), finds that 401(k) plan cashouts can reduce the probability of participants successfully replacing most of their income in retirement within the 401(k) environment by more than 5 percentage points; for hardship withdrawals the reduction can be as high as nearly 3 percentage points.  

In the report, DCIIA made the following recommendations for policymakers: 

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  • Cashouts: Reduce access to defined contribution balances by terminated participants. For example, instead of allowing cashouts automatically upon termination, plans should restrict cashouts to those in need (similar to in-service hardship withdrawals). 
  • Hardship Withdrawals: Eliminate the six-month contribution suspension requirement for hardship withdrawals. This action may decrease the potential impact, especially given possible participant inertia when it comes to re-instating plan contributions. 
  • Loans: Implement limits on loan-taking and allow post-termination repayment of loans. While EBRI’s analysis finds that loans do not appear to have a meaningful negative impact, DCIIA believes that limits may be desirable to prevent defaults by participants upon termination. At a minimum, policymakers should encourage plan sponsors to permit post-termination repayment of loans. 

 

Recommendations the group made for plan sponsors include: 

  • Actively promote the benefits of having plan sponsors encourage new employees to rollover existing balances from former employer’s plans into their new employer’s plan, possibly as part of the new hire orientation, and encourage ways to simplify and automate this process. 
  • Encourage retired employees to leave assets in the plan through communication efforts and through plan design (e.g., by allowing more flexibility around partial distributions).    
  • Facilitate rollovers by offering streamlined, online rollover options. 
  • Automatically restart contributions after the statutory six-month suspension period. 
  • Target communication messages to employees’ with hardship withdrawals to encourage restarting contributions in the plan. 
  • Reduce the number of loans allowed and/or restrict the available loan balance. 
  • Allow loan payments after termination.  

 

The full report, “Plug the Drain: Leakage and the Impact on Retirement.” is available at http://www.dciia.org.  

Deals and People August 1, 2011

Fidelity Names President of Asset Allocation Division

August 1, 2011 (PLANSPONSOR.com) – Fidelity Investments has announced the appointment of Derek L. Young as president of the company’s Asset Allocation Division.
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Young will succeed and report to Boyce I. Greer, who was recently named head of Institutional Investments for Fidelity Asset Management and vice chairman of Pyramis Global Advisors.

Young has fifteen years of experience at Fidelity, and prior to this promotion was chief investment officer of Fidelity’s Global Asset Allocation Group. He was previously a manager in the Risk Strategy Consulting Practice for KPMG, a senior financial analyst and later a supervisory financial analyst for the Board of Governors of the Federal Reserve, and began his career as a vice president at Empire Financial Services in 1986.

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The division holds more than $364 billion in assets, Fidelity stated, and provides a range of investment management services – including global asset allocation research, multi-asset class portfolio construction, third-party manager research, risk management, and financial planning solutions – to help its clients achieve their investment objectives.

“Derek is a proven leader with extensive experience managing investment activities on behalf of retail and institutional clients across multiple asset classes,” said Greer, in the announcement. “Derek will lead a talented team that will continue to focus on providing Fidelity’s institutional, intermediary and retail clients with the innovative multi-asset class and custom solutions they need to help achieve their distinct investment goals.”

 

-Sara Kelly 

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