Since 1997, trading for defined contribution (DC) plan investors was fairly leveled or heightened, but was at its lowest in April 2012. In July, just 0.11% of balances were traded throughout the month—the lowest level since then and the second lowest since the Alight Solutions (formerly Aon Hewitt) 401(k) Index began.
According to Alight Solutions, only 0.012% of balances were traded each day in July, with only one day of above normal trading. There were only three days of above normal trading in 2017 year-to-date (YTD). Most inflows went to non-U.S. funds, including 46% to international funds, with an index dollar value of $99 million, and 15% went to emerging market funds, amounting to $33 million in index dollar value.
The majority of trading outflows were primarily concentrated in company stock, with 52% of outflows and $111 million in index dollar value; stable value funds (11% outflow and $25 million); and small U.S. equity funds (11% and $24 million).
Investment portfolios were rather balanced, with 67.4% invested in equities, a jump from the 67.0% at the end of June, while 67.3% of new contributions were invested in equities.
Target-date funds (TDFs), large U.S. equity funds, and stable value funds earned spots as the asset classes with the largest percentages of total balances, at 25% for TDFs, 24% for equity funds and 11% for stable value funds. The asset classes with the most contributions in July included TDFs (44%), large U.S. equity funds (20%) and international funds (8%).
While trading activity among DC plan participants took a plunge, Alight says capital markets gathered positive results, especially with strong returns in large U.S. equity funds and international funds.
Providers, Call Centers Strive to Educate Against Hardship Withdrawals
This time of year is a peak time for hardship withdrawal requests, providers say, and call center staff and provider websites can help educate participants about implications and other options.
Under federal regulations, some plans allow participants to take out hardship withdrawals from their defined contribution (DC) plans to pay for immediate and heavy financial needs. These include tuition bills for their children.
Sue Unvarsky, chief operating officer at Prudential Financial, tells PLANSPONSOR that’s why participants’ demands for hardship withdrawals and call center volume tend to peak around August when these bills are reaching parents’ homes. Jack Schumaker of Fidelity Investments says the company’s call centers see similar patterns in the summer time. This potentially means that right now, thousands of working Americans across the country can be putting serious strains on their future retirement savings. Schumaker says that in the last 12 months ending June 30, about 2.2% of the firm’s 15.1 million 401(k) participants took out a hardship withdrawal.
He adds that around this time, staff at Fidelity’s call centers undergo reinforcement training and heavier staffing to not only deal with the expected hike in call volume, but also to ensure participants are being guided through all their choices and given information about the implications of each.
“Our obligation is to educate participants about their options whether it’s a loan, a hardship withdrawal or another option outside their 401(k) plan,” explains Schumaker. “From there, we will get into helping the participant explicitly understand what the ramifications of the decision will be.”
For example, a hardship withdrawal rarely comes at the sticker price. Hardship withdrawals are subject to income tax and an additional 10% tax on the amount taken out if distributed before the age of 59-and-a-half. Employees are also barred from making elective deferrals to the plan for at least six months after the hardship distribution.
Unvarsky says one of the biggest downsides to taking out a hardship withdrawal is that it diminishes a participant’s ability to make the most out of compounding earnings. Moreover, it’s often difficult for a participant to put the amount of money withdrawn back in the plan.
“If I took out a $50,000 hardship withdrawal, it decreases my final savings by roughly $100,000 over the next 12 years assuming a 6% return on earnings,” explains Unvarsky. “If I’m in my mid-40s when I do that, I may not retire for another 25 years.”
While Unvarsky says she’s seen hardship withdrawals as little as $2,000, she has seen some reach above $40,000. Schumaker says the average amount withdrawn as hardship distributions from 401(k) accounts served by Fidelity in the last 12 months ending June 30 was $5,730. On average, this accounted for 21.9% of a person’s 401(k) balance.
However, there are alternatives to taking a hardship withdrawal from DC plans to pay for higher education expenses.
NEXT: Finding Alternatives
While taking a loan from a DC plan account balance is
not ideal, it may be better than taking a hardship withdrawal. “If you take a
loan from your plan, you immediately set yourself up for a repayment schedule,”
says Unvarsky. “We also encourage people to explore student loans for their
children and be a cosigner. We also try to make sure they have filed for
federal student aid. It may be more cost effective to take a student loan as
opposed to tapping into retirement plans.”
However, several participants resort to hardship
withdrawals after they’ve exhausted other resources including plan
loans and emergency savings. And turning to DC plan assets
before retirement can be as much an emotionally draining experience as it is a
financial one. That’s why Schumaker and Unvarsky agree that empathy is the key
driver of many conversations taking place in their call centers.
“If you’re approaching the need for a hardship
withdrawal, you’re in a dire situation and you may be in a state of anxiety,”
says Schumaker. “So we try to really spend time with the participant and make
sure they fully understand what’s going on.”
However, a sound strategy around fostering financial
wellness among participants may help employees avoid needing a
hardship withdrawal or loan in the first place. Various providers offer different
tools and resources that can guide participants in every facet of their financial
lives from budgeting to emergency savings and developing attainable retirement
savings goals.
Unvarsky says Prudential focuses on meeting these
goals through multi-channel communication. “If customers sign up to our
website, they’ll find resources and tools that will educate them on the importance
of saving for retirement and calculating how much they should be saving to
achieve their goals.”
Research by the International Foundation of Employee
Benefit Plans also suggests that plan
design and education can help limit participant loans.
But education alone is not enough. The information needs to be actionable and a
degree of effort needs to be put in place to promote engagement and raise
awareness. The human component can help in this regard.
Unvarsky says her firm works with different companies
to run on-site educational campaigns where employees can discuss financial topics
face-to-face with professionals.
“When a person enrolls in a plan, we’re going to
educate them about the purpose of the [DC] plan as a long term savings vehicle
for retirement and how to build other emergency savings,” says Schumaker. “But
we recognize that when the person calls in, they may not have those in place
and are in a last resort … Each participant has a unique need and we need to be
sensitive to that. Our job fundamentally is to educate the participant on what
they have available to them and what the implications can be. The human
interaction is a critical part to that.”