Is the financial crisis over or is it just beginning? One of the biggest stressors employees have to deal with today is around financial issues. Employees who are stressed about financial issues are not as productive as they tend to spend time thinking about those issues. Can plan design help?

Plan sponsors have traditionally tried to make their plans more liberal by offering loans, hardships, or both to help their participants in an effort to try and get them to participate in the plan. Loans can give a participant a way to take money out of the plan and pay themselves back, but doing so comes with additional recordkeeping responsibilities for the plan sponsor.

Also see: "DOL fiduciary rule has no impact on participant understanding."

Employees pay back the loans with after-tax dollars, and those loans can become taxable if not paid back. Hardships allow employees to withdraw money out of the plan, but can only be done under certain circumstances. Employees pay current tax and a penalty on any hardship withdrawal if under the age of 59 ½ and may have their contributions suspended. Most plans offer one of the other or both. No one option is the right answer and it is really up to plan sponsor to determine what is best for their plan.

The purpose of a retirement plan, though, is to help employees accumulate assets for retirement. Do loans and hardships really help solve what the plan was designed to do? I do not think so. In the end, I believe they are a detriment to most participants’ retirement dreams.

Employers and advisers need to focus on what they can do to help participants fight the urge to withdraw from their accounts. This is where proactive education and plan design can help. If plan sponsors feel they need to have these features in their plans, they should look at implementing plan design attributes to discourage easy access to funds. This can come with the employee paying any loan fees, installing a waiting period, or limiting how many loans can be outstanding at one time.

Also see: "Changing the focus of investment committee meetings."

Employers and their advisers can also take an active role in helping educate employees about the ramifications of taking out a loan or hardship. The message can be similar to the way the public was educated about the effects of smoking and the need to change for better health. In the end, plan sponsors and advisers can only encourage participants not take out a loan or hardship. The real question for employees who continue to take out loans and hardships: Will they be able to afford to retire? Plan sponsors need to begin to take a more active role in helping their employees retire, and that may start with making a hard decision about having loan and hardship options in their plans. If employees continue to take out loans and hardships from their retirement assets, a different sort of “financial crisis” will strike home when they want to retire.

Ludwig, ChFC, AIF, CRPS, is an LPL Financial adviser with LHD Retirement. He can be reached at This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

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