In a Senate hearing held March 19 by Sens. Bill Nelson (D-FL) and Mike Enzi (R-WY) about allowing people who take out loans or hardship withdrawals to delay repayment until taxes are due, experts testified that fewer people were raiding their DC plans than ever and for less frivolous reasons. According to Aon Hewitt’s Alison Borland, only 2% of participants in their plans took a hardship withdrawal and of those, 54% did so to stave off eviction or foreclosure. The next most prevalent reason was to pay medical expenses.
Nelson and Enzi introduced the “Shrinking Emergency Account Losses in 401(k) Savings Act of 2013” (SEAL Act) on the day of the hearing. The bill would allow participants to repay their loans or withdrawals when taxes are due, not within 60 days after they leave employment. ASPPA released a statement applauding the bill.
Research by the American Benefits Institute and World at Work echoes Borland’s testimony — finding, for example, that 12% fewer plans showed an increase in loans and hardship withdrawals in 2012.
Though many advisors dislike allowing participants to tap into their retirement plans to pay current expenses, the reality is that fewer people might participate without that option. Instead, keeping some prudent reserve outside the plan may be the best guidance.
