Easy Come, Easy Go?
Earlier this year, I commented that it would be interesting to see
how expanded access to hardship withdrawals might impact that activity.
Now we have some answers.
There’s more than a little irony in a legislative body that has long bemoaned both the paucity of retirement savings and the nefarious impact of “leakage” (pre-retirement withdrawal of retirement savings) opening those floodgates a little wider – but mostly the new law, and clarifying regulations[i] seemed to provide plan sponsors a bit more flexibility in administering these programs, some welcome latitude in helping their workforce navigate choppy financial waters.
What remained unknown was – would participants take advantage – or, more precisely, would they abuse the privilege.
The first sign – and it was a bit of an eye-opener – came from Fidelity who, in a white paper,
claimed to have seen a shift in participant behavior. Not in the
percentage of participants taking loans and hardships overall, but - at
least among Fidelity-recordkept plans, there were fewer loans and more
hardships. Less than 6 months after the law took effect, based on the
evidenced trends, they predicted that the annual loan rate for 2019
would dip slightly to 9.2%, while the annual hardship rate would rise to
4.4% – up from about 3% in 2018 and an average rate of 2.2% since 2009,
according to their data.
Intrigued, I posed the question to NAPA-Net readers in early October – and the responses indicated that while the move to embrace the option was underway, it was – well, it was still underway. Just over a third (35%) said the rules were already in place at most of their clients, and nearly a quarter (24%) said they were already in place at all of their clients, while another 23% said they were in place at “some” of their clients. The rest were in “not yet” territory. The most surprising aspect (to me, anyway) was the lack of plan sponsor response to the impact of the changes (at least in earshot of their advisors).
Now we have a direct response from plan sponsors, courtesy of a “snapshot” survey on the subject by the Plan Sponsor Council of America. The PSCA found that nearly two-thirds (65%) of respondents already have adopted the new hardship provisions. However, most (73%) reported no change in the number of hardship withdrawals since the new provisions were implemented. Fewer than one in five (17.8%) noted an uptick in hardship withdrawals in 2019 – but even among those that did, the vast majority (92%) are not considering any changes to their provisions at this time. Indeed, most plan sponsors amended their plans even where change was not mandatory; 65.1% eliminated the requirement to take plan loans before taking any hardship withdrawal, and 59.6% expanded the assets available for hardship withdrawals to include earnings on 401(k) contributions. More than half (52.3%) voluntarily expanded the list of reasons that qualify for a hardship distribution.
It's still early to assess the long-term impact of these changes, of course, though plan sponsors appear to have embraced them without much hesitation. And if the recent take up rates have been pretty much status quo – well, the markets and unemployment numbers have been good, and the natural disasters that often produce upticks in financial hardships have been muted of late. Yes, it’s early to evaluate the impact – to see if greater access will mean more access, to see if removing barriers does, indeed open floodgates, or if knowing that it will be easier to access the money, individuals are less inclined to do so.
In sum, to see if addressing the hardships of today wind up creating hardships down the road.
- Nevin E. Adams, JD
There’s more than a little irony in a legislative body that has long bemoaned both the paucity of retirement savings and the nefarious impact of “leakage” (pre-retirement withdrawal of retirement savings) opening those floodgates a little wider – but mostly the new law, and clarifying regulations[i] seemed to provide plan sponsors a bit more flexibility in administering these programs, some welcome latitude in helping their workforce navigate choppy financial waters.
What remained unknown was – would participants take advantage – or, more precisely, would they abuse the privilege.
The first sign – and it was a bit of an eye-opener – came from Fidelity who, in a white paper,
claimed to have seen a shift in participant behavior. Not in the
percentage of participants taking loans and hardships overall, but - at
least among Fidelity-recordkept plans, there were fewer loans and more
hardships. Less than 6 months after the law took effect, based on the
evidenced trends, they predicted that the annual loan rate for 2019
would dip slightly to 9.2%, while the annual hardship rate would rise to
4.4% – up from about 3% in 2018 and an average rate of 2.2% since 2009,
according to their data.Intrigued, I posed the question to NAPA-Net readers in early October – and the responses indicated that while the move to embrace the option was underway, it was – well, it was still underway. Just over a third (35%) said the rules were already in place at most of their clients, and nearly a quarter (24%) said they were already in place at all of their clients, while another 23% said they were in place at “some” of their clients. The rest were in “not yet” territory. The most surprising aspect (to me, anyway) was the lack of plan sponsor response to the impact of the changes (at least in earshot of their advisors).
Now we have a direct response from plan sponsors, courtesy of a “snapshot” survey on the subject by the Plan Sponsor Council of America. The PSCA found that nearly two-thirds (65%) of respondents already have adopted the new hardship provisions. However, most (73%) reported no change in the number of hardship withdrawals since the new provisions were implemented. Fewer than one in five (17.8%) noted an uptick in hardship withdrawals in 2019 – but even among those that did, the vast majority (92%) are not considering any changes to their provisions at this time. Indeed, most plan sponsors amended their plans even where change was not mandatory; 65.1% eliminated the requirement to take plan loans before taking any hardship withdrawal, and 59.6% expanded the assets available for hardship withdrawals to include earnings on 401(k) contributions. More than half (52.3%) voluntarily expanded the list of reasons that qualify for a hardship distribution.
It's still early to assess the long-term impact of these changes, of course, though plan sponsors appear to have embraced them without much hesitation. And if the recent take up rates have been pretty much status quo – well, the markets and unemployment numbers have been good, and the natural disasters that often produce upticks in financial hardships have been muted of late. Yes, it’s early to evaluate the impact – to see if greater access will mean more access, to see if removing barriers does, indeed open floodgates, or if knowing that it will be easier to access the money, individuals are less inclined to do so.
In sum, to see if addressing the hardships of today wind up creating hardships down the road.
- Nevin E. Adams, JD
[i]The
expanded access, of course, came courtesy of the Bipartisan Budget Act
of 2018, which, among other things, set aside or made optional several
of the penalties and restrictions that had long been in place to
discourage usage, and/or to ensure that the request was “serious.” This
included aspects like the requirement to take a plan loan first (it’s
now optional), and more significantly, the suspension of contributions.
The changes not only broadened not only the categories of contributions
eligible for hardship (it now includes matching contributions and
non-elective contributions, as well as earnings on those accounts), but
also included changes in the ability to qualify for a hardship
distribution in the case of casualty losses and losses associated with
federal disaster areas. The IRS also loosened the rules for determining
the status of a hardship – arguably lessening the burden of both
requesting and approving these distributions (final regulations were published in September).
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