Leakage: It’s A Big Problem (But Perhaps Not The Problem That You Thought It Was)

Leakage: It’s A Big Problem (But Perhaps Not The Problem That You Thought It Was)

David I Gensler, MSPA, MAAA, EA

“Leakage” sounds like something seniors need to worry about. It is certainly not a term that one would associate with a 401(k) plan. But leakage can come in many different forms. And in a recent article in the Wall Street Journal, it is leakage from their 401(k) plans that has many American companies concerned.

Leakage is a term from the retirement plan industry that is used when participants tap into or pocket retirement funds early. The article stated that this practice can cause an employee’s ultimate retirement nest egg to shrink by up to 25%.

Many employers have taken some aggressive steps (like auto-enrollment and auto-escalation) to encourage their employees to save in 401(k) plans. But like a bucket with a hole in it, while those savings find their way into a company’s 401(k) plan, there is a growing awareness that the money is not staying there. If older workers cannot afford to retire, it can create a logjam at the top, leaving little room for younger, less-expensive hires.

Leakage primarily takes two forms: loans and distributions that are not rolled over. Let’s look at each one and see how some companies have found some ways to, if not solve the problem, at least slow it down.

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Why Should A Plan Sponsor Care About Automatic Enrollment?

By: David I Gensler, MSPA, MAAA, EA

No one could argue the fact that automatic enrollment, when properly implemented is a positive benefit for employees. Automatic enrollment, when coupled with automatic escalation (the automatic increase in deferrals rates) will help participants who might not otherwise be inclined to participate in your 401(k) plan save for their retirement.

We can easily identify the following benefits to the plan participants: Read More

Automatic Enrollment and Automatic Escalation – The IRS and the Department of Labor Love Them – But Should You?

By: David I. Gensler, President

Both the IRS and the Department of Labor (DOL) love the concept of automatic enrollment and its sibling, automatic escalation of an employee’s salary deferrals. But just because the government is in love with the concept doesn’t mean that you need to be.  Or (more importantly) that you are administratively geared up to handle it.  So if you are thinking seriously about modifying your plan document to change your 401(k) plan to be an “auto enroll” 401(k) plan, there are some real potential administrative speed bumps that you need to be aware of.

The concept is fairly simple. You modify your plan document, via an amendment, to automatically enroll participants at some specified deferral percentage (the one that I have seen most often is 3%).  Some plans extend the concept to all participants, others have it impact only new participants.  Now, in order to stop the deferrals, rather than formally opting in, the participant must, in writing, opt out.

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