In Practice April 20, 2015

The Things Participants Say

They’re investors who may not know much about investing—or even how their company’s retirement plan works. What are some of the most unusual statements from participants?
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Retirement plan participants can swing wildly between inexperienced and overly confident, according to advisers who have spent any time in enrollment or other participant meetings. Ryan Mumy, president and founder of Mumy Financial Advisors, says he’s especially familiar with the self-perceived experts. “I’ve gotten them multiple times: people who talk about how they day trade their 401(k) accounts, and the large percentage of returns they’ve gotten.”

One participant told Mumy he uses an online service that outlines exactly how to position his investments, giving him a return that’s over 20%—but he won’t disclose the name of the site, Mumy says. Participants commonly believe their past 401(k) plans and the one they’re currently enrolled in is free. “They think the business is paying for it, and they have zero fees,” Mumy says. The most off-the-wall comments relate to unreasonable rates of return that they speak of as if they’re almost guaranteed, and pigheadedly choosing market timing over dollar-cost averaging. Participants often cite a family member who they say is “really smart.”

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“We’d ask participants to bring their statements with them to a meeting,” says Ellen Lander, principal at Renaissance Benefit Advisors Group. “Some investors would describe themselves as very conservative investors—then they’d be 100% invested in emerging markets.”

Quite a few plan participants are unfamiliar with the names of funds and the names of the fund companies. “Many think Fidelity is a fund,” Lander says. “When you ask which fund their money is in, they say Fidelity.” Pressed for more information on which fund—emerging markets? Core bond?—they appear genuinely confused. Another common misconception, Lander says, is that people don’t understand the meaning of vesting. “They think it applies to their own money,” she says.

Take our survey and share your experiences with the most telling or unusual comments or misconceptions of plan participants. Thank you!

Data & Research April 20, 2015

Sponsors’ Approach to Loans Affects Retirement Plan Leakage

A study concludes that retirement plan loan policy is economically meaningful in shaping participant borrowing.
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In “Borrowing from the Future:  401(k) Plan Loans and Loan Defaults,” researchers Timothy (Jun) Lu, from the Peking University HSBC Business School; Olivia S. Mitchell, from the University of Pennsylvania Wharton School; and Stephen P. Utkus and Jean A. Young Jean Young, from the Vanguard Center for Retirement Research in Malvern, Pennsylvania, say their administrative dataset tracks several hundred plans over five years and shows 20% of retirement plan participants borrow at any given time, and almost 40% do at some point over five years. They estimate loan default “leakage” at $6 billion annually.

According to the research report, published by the National Bureau for Economic Research (NBER), when a plan sponsor permits multiple rather than only one loan, each individual loan tends to be smaller, but the probability of plan borrowing nearly doubles, and the aggregate amount borrowed rises by 16%. The researchers contend that this suggests employees perceive that easier loan access is actually an encouragement to borrow.

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Looking at defaults, the study found only one in ten participants who borrow from their retirement actually defaults, but the vast majority (86%) of employees who leave their jobs with a plan loan outstanding do default. In addition, workers at firms allowing multiple loans have default rates that are higher by 1.7 percentage points. Participants having only a single loan when multiple loans are allowed are 2.2% less likely to default compared to workers in plans allowing a single loan.

“The fact that many workers do borrow from and default on their plans has led some to argue that 401(k) loans should be restricted,” the report says. “Based on our results, those concerns seem overstated, particularly when compared to leakage from account cash-outs upon job change.” However, the researchers conclude that “limiting the number of loans to a single one would be likely to reduce the incidence of borrowing and the fraction of total wealth borrowed, thereby reducing the impact of future defaults.”

The research report is available for purchase or free download here.

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