Access denied! Congress urged to do more to help low-income workers build wealth

The federal government should do more to help low-income retirement savers, including imposing restrictions on when account holders can take distributions from retirement accounts and providing more time to pay back 401(k) loans, according to fintech IRALOGIX. The firm said while Congress has made efforts to enhance retirement savings, it hasn’t gone far enough to protect the most underserved, low-income workers.

“Congress has done a good job of trying to create tax incentives to help people save more, but that doesn’t really work with people who aren’t making that much money,” said Lowell Smith, co-founder of IRALOGIX. “If you’re making $35,000 a year, a tax break to you doesn’t mean much at all, but that $3,000 to pay off your credit card may mean more.”

The firm put a spotlight on the problem of employees cashing out of retirement accounts when switching jobs, also known as 401(k) leakage. Recent pension portability measures encourage workers who would have automatically rolled over to an IRA to automatically move into the account of their new employer instead. IRALOGIX praised this measure as beneficial, calling IRAs a ‘dumping ground’ with limited investment options and a lack of requirements that accounts provide adequate diversification, resulting in low returns and growth that is unable to keep up with fees and inflation.

Smith said the Labor Department should change its regulations on auto rollovers to allow better investment vehicles on an employee’s initial exit from a workplace savings plan. In addition, employers have an important role to play in helping employees understand the importance of continuity in retirement savings, especially through job changes.

“Employers can really spend more time with their advisors and the providers educating employees on the benefits of keeping money in a plan over time,” said Smith. “I don’t think there’s enough time spent showing people the power of compounding.”

He also said retirement savings leakage occurs when employees leave a company before paying back outstanding loans from their 401(k). Smith suggested all withdrawals before age 59.5 should be restricted to hardship reasons or exceptions to the 10% early withdrawal provisions, and employees should be allowed to pay that money back over time. Employers can also help in this scenario by considering offering short-term loans that can help employees during times of hardship rather than allowing them to tap into retirement savings to fund near-term expenses. Financial wellness programs can be helpful as well, particularly for young employees who may not have been taught budgeting and debt-management skills prior to entering the workforce, said Smith.

Related: Pre-retirement ‘leakage’? Job switchers are cashing out their 401(k)s at alarming rate

IRALOGIX also said state-mandated retirement plans are a good first step to closing the retirement savings gap by requiring small businesses to provide retirement benefits to their employees. It noted, however, that with only 15 states having signed such programs into law, state-level programs don’t go far enough.

“Federal intervention is needed to create one unified mandate to help businesses and service providers better meet state-mandated requirements,” said Smith. “In many cases, it’s low-income workers who have been underserved in the retirement benefits arena, and an even playing field would be beneficial to ensure every participant nationwide is treated equally.”

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.