What do we mean when we say your retirement plan could be leaking? Well, there are features and costs to your plan that are reducing the account balances and benefits for your employees. Here are the three that we see most often:
1. Hardship distributions. A hardship distribution is a plan provision that allows an employee to take a distribution from their account while they’re working because of a financial hardship. This allows employees to take money out of their account, but they do have to pay income taxes, depending on the contribution type.
In addition, if they’re under the age of 59.5, they have to pay a 10% federal and a 2.5% state penalty. When you add it all up, employees will pay almost half of their distribution to government in penalties and taxes. This is not a good deal for your employees or their retirement accounts.
2. If there is a provision in your plan for employees to take loans, this is another area where their retirement accounts could be leaking. When an employee takes a loan from their retirement account, there are two major drawbacks:
They’re losing potential earning power on their money because the money is no longer being invested.
They’ll pay taxes twice on the amount of the loan. Let me explain: If they had been making pre-tax contributions, the first time they’ll pay taxes is when they pay the loan back through payroll deduction with after-tax dollars. The second time they’ll pay taxes on that money is when they spend the money in retirement. Employees should avoid taking loans on their retirement accounts, as it will end up hurting them in the long run.
3. Excessive fees. If your employees are paying too much for their retirement account, then that money is not money they can spend during retirement. How are you supposed to know if they’re paying too much? As a plan sponsor fiduciary, you’re supposed to be benchmarking your plan for your employees on a regular basis; it is critical that you’re going through this process to make sure your employees are getting a good deal. Here at Quintes, we benchmark our clients’ plans annually with their peer group. In addition, we do a live benchmarking analysis every three to five years, where we take the plan out to live bid to see how other quality providers would price the plan.
If you would like a free plan review where we’ll do a live benchmarking analysis of your plan, please reach out to us. We would love to hear from you soon.