We hear a lot more these days about employers wanting to encourage financial wellness in their workforce. This is particularly so in the current environment where employees are responsible, through defined contribution plans, for accumulating sufficient assets for retirement.
But to really be effective, employers who genuinely want to foster employee financial wellness will need to move beyond platitudes. Raising issues to help participants address the real decisions they face every day is what’s needed, not messages about the importance of savings , or nice brochures with aspirational pictures of beaches and hammocks. Even instituting default features such as auto-enrollment and escalation isn’t enough.
My favorite example of this is the absolute reluctance of sponsors and providers to offer any guidance on whether a participant is well advised to take a 401(k) loan to pay off credit card debt, and then pay back the loan to the Plan. (I use this example given that credit card debt tends to carry a higher interest rate and more late payment penalties and fees than these other obligations.) Now, the best advice is not to get in this situation. But that just isn’t the reality for many people, particularly lower-income workers. Besides, as you can learn reading any number of articles online, there are many (though certainly not all) situations where a participant can benefit by exchanging a 401(k) loan for credit card debt.
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The question of using 401(k) loans to pay off credit card debt was one of the most common questions I heard when working in a call center over 20 years ago. Back then, I was told that you absolutely, positively, never ever ventured into that area, and was instructed to advise people to speak to their financial advisor. But even then I knew very few of the people we were working with had a financial advisor other than a colleague at work, neighbor, or some well-intentioned relative. And so, with all the renewed focus on employee financial wellness, I was curious to see if things have changed.
So I recently wrote to a colleague at one of the nation’s leading 401(k) administration firms and asked him how they currently handle that question. The answer I received was, “First off, no, we would not specifically say yes or no as that would be classified as giving advice and we do not do that. We would, on the other hand, relay to them the implications and impacts of taking a loan – including compounding interest, withdraw fees or loan processing fees, etc. We would also ask them to consult a financial advisor or accountant as a reference.” And other providers I spoke with gave me a similar response.
So it looks like things haven’t changed much over the past two decades. And in fact, we may be subtly dissuading people from taking a 401(k) loan by mentioning the drawbacks without comparing it to the alternatives.
I understand that anything resembling advice brings the worry of litigation. And the new fiduciary rules regarding “investment advice” provide a large element of uncertainty. But why not at least develop materials for participants outlining the issues? Or perhaps refer participants to a free credit counseling service? It strikes me as inadequate just to help participants focus on boosting their savings. Only a more holistic approach considering both assets and liabilities can truly make a difference in fostering participant financial wellbeing.
This post is intended to provide general commentary and is not intended as investment, legal or tax planning advice.