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How a Company with 99% 401k Participation Rates Cut Loans and Withdrawals by 50%

With high 401k participation rates, company is challenged with high loan and hardship withdrawal rate and low deferral rate.

Recently we sat with a Vice President of Human Resources for a medical research and care facility in Baltimore, Maryland who attended a Plan Sponsor University (TPSU) program at Loyola University. The company has approximately 2600 employees and reports a 99% enrollment in it 401k plan.

While the plan employs an auto-enrollment strategy and makes a matching contribution to participant plans, the Sponsors says that getting participants to increase their deferrals beyond the 3%-5% level has been a challenge due to a soft economic climate. The company also employs an auto-escalation policy, but says that employees are slow to keep pace with escalating the contribution levels.

The company is responding to this sluggish take-up in the employee deferral rate by restructuring the deferral rate ceiling to 12% and adjusting (stretching) the employer match format so that employees will continue to defer to higher level of participation.

Among the biggest challenge for the company plan is participant education and financial wellness training. Particularly, he says that employees have a high incidence of drawing loans against their 401k plan which he feels is diminishing the plan’s effectiveness for individuals.

As a result, the company has instituted a policy of allowing only one loan at a time per participant and has also tightened the requirements for hardship loan withdrawals. With regard to hardship withdrawals the company has instituted a 6 month suspension of participation from the plan for those who are granted a hardship allowance for a withdrawal.

The rationale behind the suspension is that when a participant falls into the technical definition of financial hardship, it is likely a structural financial issue that may take time to recover from and further contributions to a plan may inhibit that financial recovery.

Prior to instituting the loan and hardship withdrawal policies, the company estimates that almost 30% of participants took loans or made hardship withdrawals compared with 15%-20% who did so after the policies were tightened.

Timothy Kelly
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