Data and Research August 8, 2023

Hardship Withdrawals Rose 36% Year-Over-Year in Q2

Bank of America participant analysis shows more employees prioritizing short-term expenses over long-term saving.

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Bank of America retirement plan participants’ hardship withdrawals rose 36% year-over-year in Q2 to 0.52% of participants, according to the bank and recordkeeper’s latest participant analysis.

“This year, more employees are understandably prioritizing short-term expenses over long-term saving,” Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, said in a statement. “However, it’s critical that employees continue to invest in life’s biggest expense – retirement.” 

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In research mining the data of more than 4 million participants and released Tuesday, Bank of America found borrowing from workplace plans and hardship withdrawals were both higher this year.

“Regarding the increase in hardships, the economic environment, which has seen higher rates of inflation and cost of living, could certainly be a contributing factor,” Lisa Margeson, Bank of America’s managing director of external affairs for retirement research and insights, said via email. “That said, although the increase in participants taking a hardship seems large, it is still only 0.5% of the total number of 401(k) plan participants.”

Participants also contributed 23% less to retirement plans on average in the year’s second quarter as compared to Q1, the average contribution rate in Q2 was $1,460, down from $1,880 in Q1. While lower for the year, the contribution rate was in line with the same quarter in 2022, which had an average of $1,440.

“There are several factors driving lower dollar contributions, even as savings rates remained consistent,” Margeson wrote. “The 2023 second quarter contribution amount was in line with the same time period last year, so the drop from first quarter may have been influenced by younger participants—presumably with lower salaries—joining plans, as well as the first quarter often being a time when bonuses are awarded.”

On the plus side, the research found that average 401(k) balances were up 9.6% from the end of 2022 to $7,250. In addition, more participants increased their contribution rate than decreased it (10.2% vs. 2.2%) in Q2, led by Generation Z and Millennial employees (19.3% vs. 2.6% and 11% vs. 2.6%, respectively).

“The data from our report tells two stories—one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” said Sabbia in a statement.

The bank also revealed findings about health savings accounts and financial wellness measures, categories it added to the research this quarter to take a more “holistic look at confidence around financial preparedness,” according to the release.

Through the analysis, the bank found that HSA account balances rose 12% in the first six months of 2022 to $4,397 from $3,931.

The researchers also found that 38% of HSA account holders contributed more than they withdrew year-to-date through Q2, consistent with Q4 2022.

Meanwhile, 72% of HSA account holders used those accounts for health care expenses, and 27% plan to save for the future—a slight increase from the end of 2022, when 24% of account holders intended to maintain the account as savings.

Finally, the bank found a decline in feelings of financial wellness among participants. Out of a possible 100 points, the average financial wellness score for employees was 56, down one point from 57 at year-end. Women trailed men in the category, clocking in with an average score of 52, compared to 59 for men.

Compliance August 8, 2023

Some 4010 Pension Filers May Qualify for Reporting Waiver

Due to unusual market conditions, many 4010 filers will struggle to determine if they are required to file, so the PBGC is providing a limited one-time waiver to certain defined benefit plans

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The Pension Benefit Guaranty Corporation has issued a one-time waiver for certain pension sponsors for 4010 filings.

Scott Hittner, a partner in and the chief actuary at October Three Consulting, says that Section 4010 of the Employee Retirement Income Security Act requires companies with a pension plan with less than 80% funding to report additional financial and actuarial information to the PBGC. Waivers will be issued for smaller plans, such as those with fewer than 500 participants or whose aggregate underfunding does not exceed $15 million.

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According to a release from the PBGC, sponsors who have a valuation date between October 1, 2022, and March 1, 2023, might be eligible for a one-time waiver if certain conditions are met.

If a sponsor with an applicable valuation date meets the following criteria, they are eligible:

  • They did not need to file under 4010 for the previous five years;
  • Either none of the plans had a market-based funding level below 85% or the market-based shortfall is less than $15 million; and
  • Every plan below 80% has a value date in the eligible time period.

Hittner explains that in calculating funding under Section 4010, pension funds use a two-year average for interest rates. The two-year average was much lower than the actual interest rates for the time period covered by the waiver, which would have caused many plans with no history of being underfunded to become technically underfunded because of the way interest rates are used in the calculation. The total reduction in liabilities for the plan is not captured by the two-year average, which leads to false positives.

Hittner adds that many plan sponsors with no history of being underfunded would have been swept up, absent a waiver. Some sponsors were “looking to make extra contributions to avoid a filing” when “they were likely to only file for one year only.”

Plans that fall just outside the time range will still have to file, Hittner says, even if they have never been below 80% funding before. However, the waiver “will pick up a majority of affected plans.”

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