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Improving Economy Reduces 401(k) 'Leakage' 
Fewer employees took hardship distributions and loans from their 401(k) plans in 2012, reports a study of plan activity at American companies 

3/18/2013  By Stephen Miller, CEBS 
 
 

Fewer U.S. employees took hardship distributions and loans from their 401(k) plans in 2012 compared with 2008—a sign of economic improvement—according to a study by WorldatWork, an association of total rewards professionals, and the American Benefits Institute, the research and education affiliate of the American Benefits Council, which represents major U.S. employers.

The 2013 Trends in 401(k) Plans and Retirement Rewards survey of 476 American Benefits Council and WorldatWork member companies was conducted from Nov. 14 through Dec. 17, 2012, and provides a snapshot of defined contribution plan activity at mostly large American companies.

Among the findings, the study revealed that fewer employees are taking hardship distributions and loans—referred to as "leakage"—from their 401(k) plans. From 2008 to 2012:

  • The share of employers who reported an increase among plan participants taking hardship withdrawals during the prior 12-month period fell from 43 percent to 25 percent.

  • The share of employers who reported an increase among plan participants taking loans against their 401(k) accounts fell from 49 percent to 37 percent.

“Employers continued their investment in 401(k) plans though sustained contribution levels, enhanced plan choices and increased use of automatic enrollment features," said Cara Woodson Welch, WorldatWork vice president of policy and public affairs, in a media briefing conference call. For instance, the surveyed findings revealed that:

  • A strong majority (73 percent) of companies reported that 70 percent or more of their eligible employees participated in their organization’s 401(k) plan.

  • Despite anecdotal reports of companies suspending or eliminating their 401(k) matching to cut costs during the depths of the recession, 88 percent of respondents said their company maintained matching contributions during the previous five years.

  • More than three-quarters of companies said that the average employee contribution was 5 percent of salary or more.

  • 68 percent of companies reported that target-date retirement funds were among the top three investment choices selected by plan participants.

  • For companies providing investment advice services to employees, 67 percent reported that advice was provided through an independent adviser. This is a significant increase from the 47 percent who reported using an independent adviser to provide investment advice in 2008. 

Automatic Enrollment

Respondents were asked if their company offered automatic 401(k) enrollment, either with or without an automatic escalation clause. The survey revealed that:

Yes, auto enrollment without auto escalation

30%

Yes, auto enrollment with auto escalation

26%

No auto enrollment/auto escalation and not considering

26%

No auto enrollment/auto escalation, but considering

18%

Source: 2013 Trends in 401(k) Plans and Retirement Rewards.

  • Among employers with plans featuring automatic enrollment, the most common initial default rate for employee contributions was 3 percent to 3.99 percent.

  • Among employers with plans featuring automatic escalation (a default increase of the employee contribution each year), the most common annual escalation rate was 1 percent to 1.99 percent.

Matching Contributions

For more than three-quarters (77 percent) of surveyed companies, there had been no change in the 401(k) matching formula during the previous 12 months, nor were they currently considering a change in the near future.

However, only 9 percent of companies reported that 90 percent or more of their employees took full advantage of the company's matching contributions, while 57 percent of companies reported that more than half but less than 90 percent took full advantage of matching contributions. At 34 percent of companies, half or less of employees took full advantage of matching contribution.

“Too many workers are still ‘leaving money on the table’ by failing to maximize their employer’s match," said Lynn Dudley, American Benefits Council senior vice president, retirement and international benefits policy. “Because 401(k) plans have become such a vital component of employees’ financial security, it is essential that we strengthen the system by building on those successes.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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