'Hidden' Figures

This week was Valentine's Day—and, as usual, there’s been the typical seasonal promotions for flowers, candy, and even pajamas. 

I’ve been pretty good over the years remembering those type events—anniversaries (wedding AND dating), birthdays and, yes—Valentine’s Day. But sometimes the time gap between my remembering the date and actually getting around to doing something to commemorate it has been problematic. With Valentine’s Day that can be particularly painful, if only because so many others are scrambling to do the same thing—and at a time when delivery services (and costs), not to mention growing season(s) can be in short supply, relative to the need.

Several years back, I was running late in my preparations—and spotted an email touting a dozen roses for $24.99 (they’re a LOT more expensive now). Of course, for that price (even then), you could only get them in red (though it was Valentine’s Day, after all), and you actually got a glass vase included in that price (with options to “upgrade,” of course). 

So, I’m feeling pretty good about my bargain-hunting, but then the “other” charges emerged; “standard” delivery was another $12.99, and—at least at that (late) date, it cost (another) $9.99 to guarantee Valentine’s Day delivery, another $14.99 if you want it there in the morning, and there’s a “care & handling charge” of $2.99, regardless of delivery date or time. In fact, by the time you add in taxes those $24.99 roses will run you… well, quite a bit more than $24.99.

Not that you’ll see that all presented in one place—well, until the very last screen, anyway.

Surprise ‘Zing’ 

I wonder sometimes if that isn’t how those who request a hardship withdrawal feel—though, disclosures notwithstanding, it’s not like they can see what it’s actually going to cost at the point they make the request.

Oh, they know the amount they need, and presumably request. But then there’s the 20% withholding that comes off the top, but then, come tax time, they’ll find out if that 20% withholding was “enough.” At the same time, they’ll likely discover the 10% penalty (for those who aren’t yet 59½). Less obvious is the retirement savings “ground” they’ve lost to the customary six-month suspension of contributions (and match). And that’s not considering the 401(k) loan they likely had to take first because, after all, we have to make really, really sure that you absolutely have no other way to get to that money. Those “surprises” are likely to be lessened with the emergency savings and withdrawal provisions of the SECURE 2.0 Act of 2022, of course.[i] 

And then there are the surprises that come WITH retirement. That’s when you “discover” the DISadvantage of pre-tax savings, as Uncle Sam (and his state and city “cousins”) line up for their postponed “cut.” It’s also when Social Security (and Medicare) look to that as fresh income against which benefits (and the cost of benefits) is now means-tested (a.k.a. reduced/taxed).   

Now, if all that seems like a particularly depressing theme for Valentine’s Day, fear not. The impact of the “hidden” costs of retirement—like the hidden costs of that floral arrangement can be muted, if not mitigated, by not waiting until the very last minute to make preparations …

- Nevin E. Adams, JD 

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[i] We’ll save for another day the potential impacts on future retirement savings.

Not-So-Unforeseen Outcomes

 Thanks to their mother, my kids have grown up with a variety of pets in our house—but none more bizarre than our experience with… a chicken.

My son’s elementary school class had been exposed to the miracle of life over the course of several weeks by watching a set of chicks spring forth from eggs that had been carefully tended by the class. Once hatched and ready to be turned loose, the teacher offered to let selected children take one home—provided they obtained their parent’s permission, of course. My son was smart enough to ask his mother—who, seeing how much it meant to him—and much to my amazement, acquiesced to the request. 

And so “Grr”[i] entered our lives. Mind you, we were living in a residential neighborhood in Connecticut at the time, miles and miles from anything remotely resembling a farm. That said, the little peeping chick was adorable, and my wife persuaded me that, as the chick grew we’d be able to erect a small pen in the back yard. We even joked about being able to have fresh eggs.

Or did until the day we discovered that Grr was biologically incapable of such things—at which point it was clear that while we had thought things might turn out one way—well, we now had a loud, smelly and fairly aggressive bird in our house! It’s not that this was completely unforeseen, but it certainly didn’t take a lot of imagination to see that it could go “wrong.”

In that spirit, there are a couple of initiatives rumbling around in Congress at the moment—arguably well-intentioned, but almost certainly likely to have consequences that are not unforeseeable, though surely not what their champions expect or intend. 

The first of these is an initiative focused on expanding spousal consent—not the beneficiary designation requirement in place since the mid-1980s, but one that would basically require an in-person notarized consent for most distributions. The second revolves around discussions to significantly expand the size and flexibility of emergency savings accounts. 

‘Missed’ Directions

The expanded spousal consent provision is well-intentioned, of course. Much as the beneficiary designation requirement, it is designed to prevent one spouse from taking advantage of the other by wiping out what might well be their life savings without their knowledge or involvement. On the other hand, it doesn’t require much imagination to, in a day when men and women are about equally likely to have a 401(k), envision a situation where an abused spouse, needing to access the funds in their account to escape their situation, would be precluded by this legislation from doing so by the very spouse they are seeking to escape.[ii]

Now as for those emergency savings accounts—while the notion is quite popular these days—the problem lies with an idea being touted by the Aspen Institute. It would establish a sidecar emergency savings account with your 401(k) that could be matched—but that you could basically withdraw for pretty much any reason once you got the match. More on that in a minute.

Now, emergencies come in all shapes and sizes—but the Aspen proposal is calling for $5,000 in those accounts (rather than the $1,000 embodied in legislation such as The Enhancing Emergency and Retirement Savings Act of 2021—and they’re suggesting it as $5,000 every year. Five thousand dollars that could be put in the “emergency” savings account every year (just) long enough to get the match—and then, as mentioned above—withdrawn for pretty much any reason whatsoever. And then the next year they could do it all over again. And again. In fact, it doesn’t require a lot of imagination to see this turning into one of those “Christmas Club” savings accounts that banks offered once upon a time. Which arguably stands to create a whole other type of emergency: retirement plan “leakage”—on steroids.

You don’t need 20/20 hindsight to know that bringing a chick into a suburban Connecticut home won’t end well. We did it with a genuine desire to do something nice for our son—and hoped in our hearts that it would turn out differently than our brains would acknowledge. It didn’t, of course—but it turned out to be a situation that didn’t last long, and—thanks to a farm-owning colleague—had a (relatively) happy ending.

Something that ill conceived legislation, however well intentioned—can’t—and shouldn’t—depend upon. Particularly when the potential negative outcomes are… not so unforeseen.

- Nevin E. Adams, JD

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[i] While the name eventually seemed to fit his personality, my son simply chose to name it after a favorite character in the “Invader Zim” cartoon series.

[ii] The good news is that the champions of this legislation have decided to study the matter and its potential implications under the auspices of the Government Accountability Office.

Easy Come, Easy Go?

Earlier this year, I commented that it would be interesting to see how expanded access to hardship withdrawals might impact that activity. Now we have some answers.

There’s more than a little irony in a legislative body that has long bemoaned both the paucity of retirement savings and the nefarious impact of “leakage” (pre-retirement withdrawal of retirement savings) opening those floodgates a little wider – but mostly the new law, and clarifying regulations[i] seemed to provide plan sponsors a bit more flexibility in administering these programs, some welcome latitude in helping their workforce navigate choppy financial waters.

What remained unknown was – would participants take advantage – or, more precisely, would they abuse the privilege.

The first sign – and it was a bit of an eye-opener – came from Fidelity who, in a white paper, claimed to have seen a shift in participant behavior. Not in the percentage of participants taking loans and hardships overall, but - at least among Fidelity-recordkept plans, there were fewer loans and more hardships. Less than 6 months after the law took effect, based on the evidenced trends, they predicted that the annual loan rate for 2019 would dip slightly to 9.2%, while the annual hardship rate would rise to 4.4% – up from about 3% in 2018 and an average rate of 2.2% since 2009, according to their data.

Intrigued, I posed the question to NAPA-Net readers in early October – and the responses indicated that while the move to embrace the option was underway, it was – well, it was still underway. Just over a third (35%) said the rules were already in place at most of their clients, and nearly a quarter (24%) said they were already in place at all of their clients, while another 23% said they were in place at “some” of their clients. The rest were in “not yet” territory. The most surprising aspect (to me, anyway) was the lack of plan sponsor response to the impact of the changes (at least in earshot of their advisors).

Now we have a direct response from plan sponsors, courtesy of a “snapshot” survey on the subject by the Plan Sponsor Council of America. The PSCA found that nearly two-thirds (65%) of respondents already have adopted the new hardship provisions. However, most (73%) reported no change in the number of hardship withdrawals since the new provisions were implemented. Fewer than one in five (17.8%) noted an uptick in hardship withdrawals in 2019 – but even among those that did, the vast majority (92%) are not considering any changes to their provisions at this time. Indeed, most plan sponsors amended their plans even where change was not mandatory; 65.1% eliminated the requirement to take plan loans before taking any hardship withdrawal, and 59.6% expanded the assets available for hardship withdrawals to include earnings on 401(k) contributions. More than half (52.3%) voluntarily expanded the list of reasons that qualify for a hardship distribution.

It's still early to assess the long-term impact of these changes, of course, though plan sponsors appear to have embraced them without much hesitation. And if the recent take up rates have been pretty much status quo – well, the markets and unemployment numbers have been good, and the natural disasters that often produce upticks in financial hardships have been muted of late. Yes, it’s early to evaluate the impact – to see if greater access will mean more access, to see if removing barriers does, indeed open floodgates, or if knowing that it will be easier to access the money, individuals are less inclined to do so.

In sum, to see if addressing the hardships of today wind up creating hardships down the road.

- Nevin E. Adams, JD

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[i]The expanded access, of course, came courtesy of the Bipartisan Budget Act of 2018, which, among other things, set aside or made optional several of the penalties and restrictions that had long been in place to discourage usage, and/or to ensure that the request was “serious.” This included aspects like the requirement to take a plan loan first (it’s now optional), and more significantly, the suspension of contributions. The changes not only broadened not only the categories of contributions eligible for hardship (it now includes matching contributions and non-elective contributions, as well as earnings on those accounts), but also included changes in the ability to qualify for a hardship distribution in the case of casualty losses and losses associated with federal disaster areas. The IRS also loosened the rules for determining the status of a hardship – arguably lessening the burden of both requesting and approving these distributions (final regulations were published in September).