Even in a Boom, Many Are at Risk of Going Bust on 401(k) Loans

Boom to Bust
Layoffs are pillaging retirement savings plans for many firms
By George White

The U.S. may have just reached the longest economic expansion on record, but the news underneath the headline numbers is not all about growth. Witness recent layoff announcements from industry bellwethers General Motors (14,000) and HP (7,000 – 9,000). Both firms recently announced large reductions in staffing levels as they respond to changes rapidly impacting their business models.

Employees impacted by corporate actions such as these can benefit from a number of benefits protections, including unemployment insurance and COBRA for healthcare, and often get ‘stepped up’ for vesting of retirement benefits if not outright severance. What’s missing? Protection for 401(k) loans.

Retirement industry studies show 20 percent of participants borrow from workplace 401(k) savings plans, which can mean thousands of loans and millions of dollars outstanding at large firms. But these loans become due the quarter after a participant separates from payroll –when participants are typically stressed financially– and very often default, blowing a hole in carefully constructed retirement plans. That’s why all these layoffs deserve more attention.

Using a 2018 analysis by Deloitte that showed laid off workers with loans can lose up to $300,000 when they cash out their accounts after a default, it’s not hard to see how these large corporate actions are causing major financial disruptions in retirement readiness at these firms. For example, every thousand employees let go can translate to 200 loan defaults and $60M in lost retirement savings and penalties!

Plan fiduciaries are in a bind. The Employee Retirement Income Security Act (ERISA) put fiduciaries in charge of retirement plans to help look out for plan participants; after all, the employees borrowing had every intention of repaying the loans. Fiduciaries looking for answers should consider loan insurance, the only solution available that repays the loan of any borrower losing their job before it defaults. Built-in, low cost loan insurance automates loan default protection, and thus prevents these staggering retirement losses for participants who truly don’t deserve them.