Data & Research August 1, 2011

Plan Leakage Can Derail Workers’ Retirement Savings

Plan leakage can significantly reduce the probability that low-wage-earning participants will successfully be able to replace enough of their income in retirement, even after 31-40 years of plan eligibility, according to a new report.
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The Defined Contribution Institutional Investment Association (DCIIA) report cites cash-outs and other pre-retirement distributions to be the most harmful elements of leakage from the defined contribution system. The group’s analysis, done in collaboration with the Employee Benefit Research Institute (EBRI), finds that 401(k) plan cash-outs can reduce the probability of participants successfully replacing most of their income in retirement within the 401(k) environment by more than 5 percentage points; for hardship withdrawals the reduction can be as high as nearly 3 percentage points.  

In the report, DCIIA made the following recommendations for policymakers: 

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  • Cashouts: Reduce access to defined contribution balances by terminated participants. For example, instead of allowing cash-outs automatically upon termination, plans should restrict cash-outs to those in need (similar to in-service hardship withdrawals). 
  • Hardship Withdrawals: Eliminate the six-month contribution suspension requirement for hardship withdrawals. This action may decrease the potential impact, especially given possible participant inertia when it comes to re-instating plan contributions. 
  • Loans: Implement limits on loan-taking and allow post-termination repayment of loans. While EBRI’s analysis finds that loans do not appear to have a meaningful negative impact, DCIIA believes that limits may be desirable to prevent defaults by participants upon termination. At a minimum, policymakers should encourage plan sponsors to permit post-termination repayment of loans.

Recommendations the group made for plan sponsors include: 

  • Actively promote the benefits of having plan sponsors encourage new employees to rollover existing balances from former employer's plans into their new employer's plan, possibly as part of the new hire orientation, and encourage ways to simplify and automate this process. 
  • Encourage retired employees to leave assets in the plan through communication efforts and through plan design (e.g., by allowing more flexibility around partial distributions).    
  • Facilitate rollovers by offering streamlined, online rollover options. 
  • Automatically restart contributions after the statutory six-month suspension period. 
  • Target communication messages to employees’ with hardship withdrawals to encourage restarting contributions in the plan. 
  • Reduce the number of loans allowed and/or restrict the available loan balance. 
  • Allow loan payments after termination.  

The full report, “Plug the Drain: Leakage and the Impact on Retirement.” is available at http://www.dciia.org. 

Deals & People August 1, 2011

Fidelity Names President of Asset Allocation Division

Fidelity Investments has named Derek L. Young as president of the company’s Asset Allocation Division.
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Young replaces Boyce I. Greer, who was recently promoted from the position to head of Institutional Investments for Fidelity Asset Management and vice chairman of Pyramis Global Advisors.Young will report to Greer.

Young has been with Fidelity for fifteen years, previously serving as chief investment officer of Fidelity’s Global Asset Allocation Group. He also worked as a manager in the Risk Strategy Consulting Practice for KPMG, a senior financial analyst and later a supervisory financial analyst for the Board of Governors of the Federal Reserve, and began his career as a vice president at Empire Financial Services in 1986.

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The Asset Allocation Division holds more than $364 billion in assets, Fidelity reports, and provides a range of investment management services – including global asset allocation research, multi-asset class portfolio construction, third-party manager research, risk management, and financial planning solutions – to help its clients achieve their investment objectives.

“Derek is a proven leader with extensive experience managing investment activities on behalf of retail and institutional clients across multiple asset classes,” said Greer. “[He] will lead a talented team that will continue to focus on providing Fidelity’s institutional, intermediary and retail clients with the innovative multi-asset class and custom solutions they need to help achieve their distinct investment goals.”

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