A successful retirement program is stable and secure — helping to ensure sufficient savings and providing meaningful income in retirement for participants. If a plan is articulated well and understood by participants, they’re more likely to understand, appreciate, and actively participate in it.

Your people know they need considerable retirement savings — and they’re feeling financially insecure

Studies show that U.S. adults believe they will need $1.46 million to retire comfortably — a whopping 53 percent increase from what was reported in 2020. An August 2024 survey of retirees by CNBC and SurveyMonkey noted that one in five retirees (21 percent) said they had no retirement savings.

At the same time, one-third of adults do not feel financially secure, according to a new study from Northwestern Mutual — the highest level of insecurity recorded in the study’s 15-year history.

No wonder financial stress is at an all-time high.

What’s so hard about saving?

Plenty!

For starters, financial concepts, terms, and plans are a foreign language for many plan participants. Then there’s decision paralysis. The financial pressures of today’s world are unprecedented, with many competing priorities vying for a piece of our financial pie. Between student loans, health care expenses, credit card debt, emergency outlays and more, it can be hard to know where to start.

Financial stress is nothing new. The good news is, there are things plan sponsors can do to help.

Make retirement savings a no-brainer

Here are three things plan sponsors can do to set participants up for success:

1. Enroll them automatically in the DC plan at a default contribution rate.
2. Offer a match (and promote, promote, promote its value).
3. Increase savings every year.

It’s important for participants to understand this is an income plan for their future. When they’re no longer working, the savings from this plan will fund their lifestyle, just as their occupation does today.

When it comes to investing, some participants will grasp the basics, but few will have an advanced understanding of what to do. Target-date retirement funds are a straightforward, simple option for participants who have no investment knowledge and might otherwise make some investing mistakes. On the other hand, these funds don’t see the big financial picture of any one individual, and the one-size-fits-all formula is subject to flaws. Encourage participants to work with a financial advisor to customize their portfolio mix based on risk tolerance, age and the amount they think they’ll need to retire. Consider offering a retirement planning benefit and/or financial coaching to help participants with their retirement planning and overall financial wellness.

When the going gets tough: loans and hardship withdrawals

We all know the funds in a DC plan are best left untouched. In some cases, though, taking a withdrawal or loan from the plan may make sense. Either option needs to be carefully considered together with how the funds will be repaid so the value of the DC account at retirement will not be diminished.

Which option is best? The bottom line: If a participant is not in dire financial straits but still needs to take money from their DC plan account, a loan is usually a better choice than a hardship withdrawal.

A hardship withdrawal is allowed only when there’s an immediate and significant financial need, and usually only the amount required to fill the financial need can be withdrawn. Not only are these withdrawals subject to ordinary income tax, if the participant is under age 59½ they’re also subject to a 10 percent early withdrawal penalty, unless an exception applies. The IRS will allow someone to automatically qualify for a hardship withdrawal based on certain situations, such as medical expenses for themselves or their spouse, funeral expenses or payments to prevent eviction or foreclosure.

A loan allows the participant to borrow up to 50 percent of their vested balance or $50,000, whichever is less. While a loan is usually the best option, there are some considerations. If the participant leaves their job and doesn’t repay the loan within a specific period, it’s treated as a regular distribution and would be subject to income tax and the early withdrawal penalty, just like a hardship withdrawal. The upside to a loan is that the participant is basically paying the money back to themself — and is usually repaid with interest, which can help make up for earnings lost by not leaving money in the plan.

Here are some examples of when someone might want to consider a loan:

• Consolidating high-interest debt if the person’s credit doesn’t qualify for a low rate on a personal loan or debt consolidation loan
• Buying a home
• For those with sufficient retirement funds, making an investment, such as purchasing a home as an investment property
• The person has a comfortable retirement cushion and is looking to make a big purchase, such as a vacation home or putting a child through college. If the person is considering a loan, be sure they understand the tax consequences of the loan.

New options for emergency withdrawals are now available

With the passage of SECURE 2.0, plan sponsors can now offer two new opportunities for participants to address financial emergencies using funds from their 401(k) plan:

• One way is through an emergency personal expense distribution (EPED), which generally allows a participant to take a penalty-free distribution for up to $1,000 (indexed) upon self-certification of an emergency need. An EPED is limited to one distribution every three calendar years, unless the amount is repaid to the plan or equivalent contributions are made. (For more information about EPEDs, see our July 2, 2024 insight.)
• Another way is through a pension-linked emergency savings account (PLESA), where participants can choose to accumulate up to $2,500 in a separate account which they can tap for emergency expenses on an income tax-free and penalty-free basis as often as once a month. PLESAs are funded with Roth contributions only and count towards any employer matching contributions, so they encourage participants to save for retirement. (We discussed PLESAs in our January 18, 2023 insight.)

These programs are intended to be used with funds that can be accessed quickly without the need to provide documentation. Participants are not required to pay back EPEDs or replenish PLESAs, but can do so if desired, and neither are subject to the 10 percent early withdrawal penalty.

How to help participants take their retirement savings to the max

We believe that a successful retirement program centers on providing meaningful retirement income, enabling stable contribution requirements and ensuring benefit payments are secure.

So how can you help your participants get the most out of their DC plan and other retirement savings vehicles?

Encourage them to follow these simple rules:

1. Continue to increase their 401(k) contributions.
2. Max out salary-deferred contributions (or contribute as much as their budget will allow). If they’re younger than age 50, they can contribute up to $23,000 from their salary in 2024.
3. Make catch-up contributions if eligible. If they’re age 50 or older in 2024, they can contribute an additional $7,500 annually.
4. Review contribution amounts annually. A DC plan is not a “set-it-and-forget-it” account.

If a distribution or loan is absolutely necessary, participants should consider the tax implications and make a repayment plan.

What if someone has maxed out their DC plan contribution? They could consider opening an IRA, boosting their personal emergency fund, saving in a Health Savings Account (if eligible), increasing contributions to a child’s 529 savings plan or just invest in a taxable account.

Most participants need help when it comes to savings. Plan sponsors are in a unique position to point them in the right direction.

We can help you navigate the right plan design and retirement income solutions for your people, and create a communication strategy to help educate and engage them so they take action.