'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 

---

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

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

---

[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).

'Hidden' Costs

Valentine's Day was this week, and you have perhaps seen those increasingly ubiquitous advertisements for a certain online florist.

Now, I’ve used that particular service on many an occasion over the past several years; they are not only convenient, they deliver a quality product, and on time. In sum, I’ve used them before, have, in fact, used them this year, and will doubtless use them again.

The ads tout the ability to get a dozen roses for $24.99. That’s in red only (but hey, it’s Valentine’s Day), and you do actually get a glass vase included in that price (with options to “upgrade,” of course).

That said, “standard” delivery is another $12.99, and – at least at this (late) date, it’ll cost you $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.

Hardship Costs

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 6-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.

Still – and though the 61st Annual Survey of Profit Sharing and 401(k) Plans from the Plan Sponsor Council of America (PSCA) indicates that more than 80% of plans offer a hardship withdrawal option – only 2.3% of workers who have access to them take them. Data from the nonpartisan Employee Benefit Research Institute puts that at fewer than 2%, and Vanguard’s “How America Saves” study says that only about 3% of participants do.

Expanded Access

Then late last year, Congress passed the Bipartisan Budget Act of 2018, which, among other things, set aside several of these “hidden” costs, notably the requirement to take a plan loan first (it’s now optional), and more significantly, the suspension of contributions. They 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 – which should lessen the burden of both requesting and approving these distributions.

Now, despite the retirement focus of these savings, I’ve always thought that it was important to provide emergency access. After all, if you thought that there was no way you could ever tap into those funds in a dire situation no matter what, wouldn’t you hold back on savings? And while there are almost certainly abuses, the relatively low take-up rates despite the widespread availability suggest that those are the exception, not the rule. The new rules, while they certainly open the door to pre-retirement withdrawals a bit wider, seem, for the most part, a thoughtful extension of potential relief to individuals that surely need it.

What remains to be seen – the new provisions were only just effective for plan years beginning on or after Jan. 1, 2019, after all – is how that expanded access will influence the historically low take-up rates on hardships.

And what the ultimate cost will be.

- Nevin E. Adams, JD