HR groups continue to try to find ways to help employees make the right decisions without doing it for them. The focus over the last several years on auto-enrollment, auto-increase and qualified default options has helped get employees engaged in retirement plans. Participants have embraced these plan features and have started participating in the plans because plan sponsors have made it easy for them to do so. Employees, however, have a hard time keeping focus on a benefit they may not use for 30 years, leading them to think of ways to use the money now. Plan sponsors need to be vigilant about keeping employees focused on the end goal.

Some participants use their 401(k) account as an emergency fund. Taking loans from a plan leads participants to inevitably contribute less in the long run. They will end up with less retirement income and thus need to work longer. Hardship withdrawals remove savings that cannot be repaid. This impacts the future account balance for employees. Impulsive behavior, like trying to time the market, can also have a severe impact on investment performance and the account balance at retirement.



Employers can reduce these behaviors with a combination of plan design and financial education, according to Liz Davidson, chief executive officer of Financial Finesse. Plan sponsors need to use various tactics to help employees reduce these behaviors. Continued education is something that should come in different forms and be repeated on an ongoing basis to hit the employee at different points in their life. Davidson has tips on how to target employees for each of the aforementioned negative behaviors.

To reduce loans:

* Reduce the number of outstanding loans participants may have at one time.

* Limit funds that can be borrowed to participant contributions and gains on those contributions.

* Educate participants who seek a loan by requiring a discussion with a financial counselor at the time of a request.

To reduce hardship withdrawals:

* Use the IRS guidelines for withdrawals, rather than just a broad "heavy financial need" threshold.

* Automatically start contributions after the six-month suspension following a hardship withdrawal.

* Require participants to speak with a financial counselor at the time of a request.

To reduce impulsive financial actions:

* Somewhat restrict the frequency and number of investment changes participants can make from, for example, daily to weekly - over even monthly.

* Offer the chance to speak with a financial adviser before any change.

* Make education on current trends in the markets easily accessible.

Davidson notes that there is a "delicate balance to be struck" with these options. Plan design that is too restrictive may cause participants to dislike employer-imposed limitations. But, design can shape positive behavior. Combining effective plan design with financial education can encourage good participant saving behavior and simultaneously protect the company. This, in turn, will help employees reach their end goal of secure retirement income.

Ludwig, ChFC, AIF, CRPS, is a financial adviser with LHDretirement. Reach him at

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