Q: An employee has requested a hardship withdrawal from the 401(k) plan. We are relying on his statements to the plan administrator that he is in true financial need, but another person in the office says he actually does have money in the bank. Do we take the word of the person requesting the withdrawal, or demand documentation.
A: The pertinent point is whether or not the Plan Administrator has “actual knowledge” of the participant’s financial status. In the Final Regulations covering hardship withdrawals, released on September 19, 2019, the Internal Revenue Service (IRS) addresses that point. One requirement for the granting of a hardship withdrawal is that the money is necessary for an immediate and heavy financial need. The employee must provide a representation that he or she has insufficient cash or other liquid assets available to satisfy the financial need, and the distribution may not be made if the administrator has actual knowledge to the contrary. In the final regulations, the IRS states, “The requirement does not impose upon plan administrators an obligation to inquire into the financial condition of employees who seek hardship distributions.” Because administering hardship withdrawals is a fiduciary responsibility, we urge you to consult legal counsel before making a decision. Read the final hardship regulations in the September 23, 2019, Federal Register. For more information, see https://tinyurl.com/HardshipDistrFinal.
Q: Do you have any tips for forming a retirement plan committee? We recently implemented a 401(k) plan and want to get the committee off on the right foot.
A: Congratulations on the plan, and on seeking an optimal structure for plan oversight. There is no need to reinvent the wheel; a lot of good information has been published on the topic of retirement plan committees. In fact, Nuveen, a TIAA Company, included some interesting thoughts in its publication, next. Along with ideas such as selecting the right number of members for the committee, utilizing a committee charter, and thoroughly documenting actions and processes of the committee, the article discusses the benefits of considering diversity. After all, they suggest, diversity among juries and employees, on corporate boards and in academia results in better decisions — and they cite a variety of studies to support the claims. It would follow that retirement plan committees could also benefit from a more diverse committee. Among the factors to consider, according to Nuveen, are gender, race, religion, age, culture, socioeconomic background, education and functional expertise. Read the article in next issue no. 3, https://www.nuveen.com/dcio-next-fiduciary-perspective-issue-3.
Q: A soon-to-be-retiree asked our HR staff some questions about Social Security benefits. From her questions, it was apparent she did not understand the basics about the Social Security program. Is this a topic we should avoid, or should we include it in our retirement education?
A: By all means, include accurate information about Social Security, because for most Americans, it will make up a large portion of their retirement income. According to the Social Security Administration, it will replace roughly 40% of preretirement income for the typical retiree. Considering that many financial advisors recommend striving for replacement of 70% of preretirement income, Social Security may account for more than half of the total in retirement. Yet, misunderstandings about the program abound. When you provide education for preretirees, don’t wing it. Ask your plan service providers if they can offer specific materials about Social Security. It can be especially helpful for this group to have one-on-one meetings with a financial advisor when they have an estimate of their Social Security income in-hand. Among other valuable topics, preretirees need to understand the long-term impact of starting their Social Security benefits too early.
For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation. ©2020 Kmotion, Inc.