There is a danger lurking on the pathway to retirement security, and your employees are likely unaware of its potential to derail their efforts to save.
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To understand the danger, a visual may help. Picture a colander. For some reason, you decide to fill it with sand. If you move quickly enough, you may eventually fill the colander all the way to the top. If you had used a bowl instead, however, you could make that goal much sooner and with less effort.
This messy illustration is a way to sum up what the retirement plan industry calls “plan leakage.” Leakage occurs when participants take money out of their 401(k) accounts early. It can have a greater or lesser impact on their ability to reach retirement, depending on how they take the money out. But no matter which way they do so, rest assured that there is an impact.
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This article on plugging 401K holes is spot on. Our company (401K Plan with approximately $ 40 million in assets dropped the loan feature approximately 18 months ago. Even though we gave significant advance notice, we had some employees ask for loans after the change – while disappointed, the responses were less painful than anticipated. One point we used to explain the elimination of loans is just what a bad deal loans are. we always point out that one borrows money that has never been taxed, pays it back with after tax money and then pays taxes again when the employee gets normal 401K benefits.
We also do continuous education and reminders to our employees as to why they should consider a 401K rollover to an IRA or new employer’s 401K when they leave us. The percent of employees who ‘cash out’ has been reduced, however, we still see some people cash out significant sums from time to time.
One of our initiatives this year is to encourage employees to set up a separate emergency savings account and have a fixed sum deposited into that account each pay period.