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Retirement Plan Leakage a Constant Concern for Plan Sponsors

Retirement Plan Leakage a Constant Concern

Retirement Plan Leakage is a constant concern for plan sponsors and industry professionals.  When 403b plan and 401k plan participants make withdrawals from their tax-qualified plans prior to reaching their retirement age, the plan participant faces ordinary income taxes and penalties.  This retirement plan leakage results in a dramatic negative impact on the plan participants’ retirement savings.  The question becomes, What can a Plan sponsor do to reduce the impact of retirement plan leakage prior to a participants’ reaching normal retirement age?  At the conclusion of a Plan Sponsor University (TPSU) Fiduciary Education Program held at Hawaii Pacific University, in Honolulu, Hawaii, Fred Barstein, TPSU Founder and CEO, spoke with TPSU Adjunct Lecturer, David Lum.   In this 401kTV clip, Mr.Lum  provides valuable insight on how Plan Sponsors and plan participants can collectively address the problem of retirement plan leakage well in advance of any need for emergency funds.

Full Transcript Here

Fred Barstein:
Fred Barstein with 401kTV here in beautiful Honolulu where we just completed at TPSU program at Hawaii Pacific University. I’m here with David Lum who is our adjunct lecturer. Welcome, David.

David Lum:
Thank you, Fred.

Fred Barstein:
Okay if we asked you a few questions?

David Lum:
Sure.

Fred Barstein:
And David is the managing director of the SageView office here in Honolulu. He’s been an investment and retirement professional for 25 years and SageView is one of the largest retirement specialty firms, 24 offices around the country and billions and billions of dollars under management. So today, David, at our program, it came up, the unique challenges of saving for retirement in Hawaii, which I think pertain to any area where the cost of living is high. So the difference is, it’s true for everybody here and throughout. So what are the challenges that people face here for saving for retirement?

David Lum:
Well, as you know, the cost of living is really high, but on the flip side of that is the incomes are not that low. We live in a service economy over here. And so people work really, really hard to make ends meet. And many people work two or three jobs. A typical household will have three plus jobs in it in order to make ends meet. And so there’s a good reason why the national statistics show that we get fewer hours of sleep here in Hawaii than any other state in the union. It’s because people are working really hard.

Fred Barstein:
They’re working hard and so… But this is supposed to be where you relax and the environment is relaxed here.

David Lum:
The price of paradise.

Fred Barstein:
The price of paradise, right? So how do you help people in those kinds of situations? Their budget’s strapped and they’re working hard so they don’t have a lot of time to focus on this. What do you do? What do you recommend?

David Lum:
I think that auto features make a whole lot of sense, but we take it a little bit step further because we think that it’s important for everyone to have emergency savings on the side. So instead of just direct depositing their funds into their checking account, we encourage retirement participants to, besides doing their 401k, save some money into a savings account and just split their direct deposit into two different bank accounts; a savings and checking. And the savings is there for unexpected expenses. Instead of having to take out a plan loan or hardship withdrawals or have to separate from service just to get the distribution, it’s far better for them to just plan wisely and create automatic savings that are outside of the 401k to supplement their non-retirement needs.

Fred Barstein:
Right. So when you talk about retirement, it’s very holistic, right? You can’t just say, “Save for retirement, save.” You’ve got to look at their situations.

David Lum:
Yes. Financial wellness is huge over here. It’s so important because, well, we live in a consumer economy, everywhere in the United States. So we’re not immune to those temptations everywhere around us. And the reality is that a large percentage of the population here is living a little bit beyond their means. They probably manage their budget just in time. We’re all living from paycheck to paycheck. And so if there’s this a little disruption in the paycheck or if you have a little bit of extra unexpected expenses, things go awry and that’s where you have the plan loans, you have the hardship withdrawals and things like that. And so it’s just trying to support participants in helping to be a little bit more mindful about how to be smarter on those small decisions that can make a big impact in the long run.

Fred Barstein:
So this was your first TPSU program. What was your impression and what do you think Plan Sponsors got out of this?

David Lum:
I thought it was a great program and it was an honor and privilege to be a part of the first inaugural TPSU here in Honolulu, Hawaii. I really appreciate that opportunity, Fred. But I think that it was fun and engaging to have these presentations, but really, ultimately, it was the opportunity for the Plan Sponsor community here in Honolulu to come together and share ideas, interact with each other, and collaborate to come up with what works for them. And just from learning from each other, because ultimately we’re all here for the same purpose, to try to support the employees in having a better retirement future.

Fred Barstein:
Well, hopefully, you’ll invite TPSU back. We love coming to Hawaii even though we live in Jupiter, Florida. It’s still wonderful to come here, so thanks for your time and your support of TPSU and thank you for watching 401kTV.

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