PLANADVISER - March/April 2021 - 32

plan design | education
keep pushing that and showing it the industry reports that
recommend it should allow only one. "
A second line of attack is to guide the behavior of the
population of borrowers, through targeted communications
supplied by a united front of advisers, recordkeepers
and sponsors.
A first step identifies the motivations of two groups.
One of those groups, Greenleaf says, is " those people
who get into a jam and need a source of liquidity. "
The second group is " people who use their 401(k) as a
'holiday club' account, " says Dietch. " As a recordkeeper, you
don't want to shame people, but we see these behaviors and
communicate them to employers. "
Francis Investment Counsel, in the Milwaukee suburb of
Brookfield, however, did an exercise to determine why one
client's workers were taking loans. " The primary reasons
were medical circumstances and that the loans cost less
than credit cards, " says Ed McIlveen, the firm's chief investment
officer (CIO). " We would want to do everything possible
to leave that type of borrowing intact, for people looking to
manage their lives in sensible ways. "
Either way, in looking for plan loans, participants are
apt to search online first, so effective communications and
projections from recordkeepers are essential.
Personal Communications
Advisers and recordkeepers agree that a personal communications
approach will likely be most effective. " For
participants to be confident they're making the right decision,
someone has to sit down with them, one on one, and
employers should be able to provide that, " McIlveen says.
" It's labor-intensive and time-consuming, and, as much
as the industry has tried to mechanize decisions, a loan
discussion just can't be automated. "
A year into the pandemic, advisers can survey its impact
on participant borrowing activity, and some have been
finding it less than was originally feared. " We saw that people
were concerned about the economy, but largely they stayed
the course, " says Schaaf. " Participation was stable, and 95%
stayed with their investment allocations. We saw an uptick,
in our base, of about 6% in loans and withdrawals, but most
people did a good job of not overreaching. "
Levinson concurs. " Now is the time to take advantage of
that shift in attitudes, " he says, " and to have more conversations
about emergency savings that can reduce borrowing
from 401(k) accounts. " -John Keefe
A Behaviorist, on Borrowing
PLANADVISER Managing
Editor
Judy
Faust Hartnett asked Sarah Newcomb,
Ph.D., director of behavioral science
at Morningstar in Chicago, about the
trade-offs that need to be considered
when it comes to participant loans.
PLANADVISER: Why is borrowing from
the retirement plan of greater concern
than borrowing in general?
Sarah Newcomb: I think the issue of
borrowing from employer retirement
savings accounts touches on a major
weakness in our financial systems,
which is that people often are painfully
uninformed about the true costs
involved in trade-offs, and so they are
easy marks for simple-but-false logical
arguments and marketing tactics.
For example, when people are
enticed to borrow from their retirement
account, the argument is often framed
along the lines of, " You're borrowing
from yourself! " or " Yeah, you're paying
interest, but you're paying it to yourself! "
as if that means it's not a real loan
or it's less costly, which isn't true.
If you can borrow from a bank with
a lower rate than you expect to earn in
the market, then you're almost certainly
better off. When you borrow from a
bank, you incur a cost of borrowing in
the form of interest. When you borrow
from your own retirement funds, you
incur interest plus the opportunity cost
of missed growth on the money tied up
in the loan. That can be a bigger drag on
your money than people realize. Then
there's the complex tax hit you take.
However, getting a personal loan
is not always as easy as taking a 401(k)
loan, and people may opt to borrow
from their retirement savings because
they don't want the hassle or the scrutiny
of their finances. Feelings of uncertainty
and vulnerability are emotional
costs of borrowing money, and it's
harder to assign a value to these.
PA: From a behavioral standpoint, how
can retirement plan advisers coach
sponsors to design their plan, so fewer
loans are taken?
Newcomb: Plan sponsors can improve
their messaging when it comes to
the costs and benefits of borrowing
from retirement accounts. Sponsors
need to recognize that people will be
approached by salespeople who have
been trained to suggest borrowing from
a retirement account to fund things
such as home purchases or other large
expenses. These salespeople know the
emotional buttons to push, and if sponsors
hope to help people stay invested,
then the emotional benefits of doing so
need to be made more salient. Education
can go a long way-if it's done well.
Feeling like you're in control is not
the same as making the wise financial
move. Advice for borrowers and plan
providers is to help participants think
through the true costs and benefits of
their decision. My advice to providers
and financial service people: It's hard
to make good advice short, clear and
emotionally compelling, but providers
that want to see people make sound
choices need to get better at coming
up with slick marketing messages for
sound advice.
32 | planadviser.com March-April 2021
http://www.planadviser.com
PLANADVISER - March/April 2021

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