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Fewer workers tapping their 401(k) for loans, study shows

Fewer people tapped their workplace retirement accounts for temporary loans or "hardship" withdrawals last year, according to a study released Wednesday by WorldatWork and the American Benefits Institute.

The poll of some 500 companies about employee participation in workplace 401(k) plans found that loans increased in 37 percent of the companies, down from 49 percent of companies in 2008. A quarter of the companies polled said they saw an increase in hardship distributions from plans, down from 43 percent of companies that reported this in 2008.

Hardship loans come with high fees and are often used for down payments on homes or to cover expenses when children are born. The drop in withdrawals may be due to an improved economy for employees, experts said. In addition, companies are directing more resources to communicate with employees about financial wellness, so workers may no longer see their retirement nest egg as the most viable option for instant funds.

"Companies are providing more financial advice such as debt management to employees and helping them to look at the whole picture," said Lynn Dudley, senior vice president for policy at the American Benefits Council.

Higher participation
Since the Pension Protection Act of 2006 set out new requirements for employers that offer retirement and investment advice, 53 percent of companies said they provide such advice, and two thirds of those do so through independent financial advisers.

Most companies continued retirement plans and matches through the recession. According to the report, 88 percent of companies neither suspended nor eliminated their matching contributions during the previous five years. In all, 92 percent of the companies polled said they provide a match to contributions.

Companies with auto-enrollment features had higher participation rates than those without it - 37 percent of companies with auto-enrollment reported 80 to 90 percent participation. Only 21 percent of companies without auto enrollment reported participation in this range.

Companies are also building annuity offerings through defined benefit plans, which contain lifetime-payout options. About 12 percent of the companies in the study said they offer annuity options, and 21 percent said they are considering it for the future.

Problems linger
Despite this progress, overall savings still lag industry estimates of what people are expected to need upon retirement - which is to save 15 percent of current salary, according to T. Rowe Price, the Baltimore money management firm.

More than half of the companies said the average employee contribution is between 5 and 7 percent. For 22 percent of the companies polled, the average employee contribution is between 2 and 4 percent. Fewer than 10 percent of employees were contributing the maximum allowed contribution, which was $17,000 in 2012.

"Most savers feel they are doing as much as they can, and there is no way they can save 15 percent every year," said Christine Fahlund, a financial planner and vice president of T. Rowe Price Investment Services. "That is where plan sponsors need to help by including auto-increase provisions in plans. Gradually is usually better when it comes to trying to change your savings behavior."

Meanwhile, federal changes in fee disclosure, which were required to take affect by September of last year, have done little to educate people about their involvement with retirement plans. More than half of employers said that new fee disclosure rules did not make plans more clear to employees.

Instead companies are offering more advice. "More employers are focusing on financial well-being, adequacy, and communicating in a way that helps people take action," said Dudley.

Policy makers may have avoided setting minimum default rates too high in the beginning, but now is the time to encourage making them higher, said Dudley. They could also include the ability to auto-increase when an employee gets a raise or a tax refund, for example.

"We must look to policy to support 401(k) plans," which have been strongly accepted by employers, she said.