We often refer to defined contribution plans as glorified savings accounts because of the ease with which participants can access their funds. According to a recent survey by PLANSPONSOR, 13% of 401(k) participants currently have an outstanding loan. Furthermore, the Vanguard Center for Retirement Research claims that 40% of DC participants have taken a loan at one time during the last five years. Incredibly, this loan activity creates a series of defaults that produce annually $6 billion in account leakage.
The KCS defined contribution business sees first hand the onerous impact from easy access to one’s “retirement” account. Our colleagues on that team receive frequent calls from our many plan participants seeking immediate access through their loan provisions. The reasons for needing funds cover all the bases from education to health to housing to the sublime.
In order to help protect retirement accounts from becoming emergency savings vehicles, there is a push to establish side-car accounts either within retirement accounts or separate that would take after-tax payroll deductions. The idea is to fund the emergency account up to $1,000 or $1,500. Any additional contributions would flow to a participant’s retirement account for long-term investment. If the participant taps into their emergency fund, future after-tax contributions would be used to replenish the savings account before making additional contributions into the retirement vehicle.
Earlier this week The Strengthening Financial Security Through Short-term Savings Act, S.3218 was introduced by a bipartisan group of Senators—Cory Booker (D-NJ), Tom Cotton (R-AR), Heidi Heitkamp (D-ND), and Todd Young (R-IN) to allow employers to offer short-term savings accounts with automatic contribution arrangements for financial emergencies. Getting this legislation through Congress should be a priority. The demise of the defined benefit pension has placed great responsibility on the individual to fund, manage, and disburse a retirement account. This legislation will help remove some of the barriers to accomplishing that objective.