The financial black hole created in part by radioactive mortgages and other bad debt, and now swallowing jobs and investments, has also nipped about $2 trillion from Americans' retirement accounts.
In just 15 months, reported Peter Orszag, head of the Washington-based U.S. Congressional Budget Office, the financial crisis has gutted workers' savings plans, causing many to consider delaying retirement. Orszag made his statements in early October before a congressional hearing investigating the causes and effects of the financial cataclysm.
While pundits use terms such as "recession" and "worst financial crisis since the Great Depression" to describe the economic mess affecting nearly 60 percent of U.S. workers in the private sector who hold 401(k) accounts, the red ink on their quarterly statements tells them all they need to know about the meltdown.
Financial planners say they have been fielding a noticeable increase in calls from 401(k) participants seeking loans or hardship withdrawals from their plans, or just plain reassurance. HR experts have been tracking loan and withdrawal requests, as well as a trend in shifting allotments toward less risky investments.
Without exception, they all agree on one point: HR should lead the way toward helping employees understand what the crisis means to them and how they can weather the storm without panicking or unnecessarily cracking open their retirement nest egg.
Steve Williams, director of research for the Society for Human Resource Management, says many companies are already offering some form of training around debt management. In a January study of 329 HR professionals from the Alexandria, Va.-based professional association, 41 percent offer such training through HR, an employee-assistance program or another third party, he says.
He stresses, however, that HR should never offer investment advice to employees.
"There's a difference between advice and education," he says. "If they want to give advice, they should use a third party."
In the study, SHRM also found there had been a 39 percent increase in employees seeking loans from their 401(k)s, and a 14 percent increase in hardship withdrawals. Although Williams says the organization is about to conduct a new study on the issue, he adds, "we're also hearing anecdotally that a lot more are continuing to request advances."
While loan and hardship withdrawal requests may be legitimate -- to pay off debt or prevent a foreclosure -- Williams says the market upheaval could cause employees to act rashly.
"There's a lot of panic going on, and people may feel the need to withdraw their money or they're going to lose more money," he says. "What they need to do is be educated about their long-term retirement planning."
Withdrawal Calls Rising
Andrew McIlhenny says he knows about the panic firsthand. At his office in Philadelphia, he's been juggling phone calls from nervous plan participants. McIlhenny, an executive vice president at Firstrust Financial Resources LLC, has designed and managed defined-contribution plans for 20 years.
While some plans are designed so that HR handles all requests for loans and withdrawals, other plan designs free a company's HR department entirely from processing such requests. Such HR hands-free plans, says McIlhenny, provide a toll-free number or Web site access for employees. The employer receives reports about such transactions, but after-the-fact, in some cases.
Even in plans where HR is the designated first contact, McIlhenny says he sometimes ends up being the first one participants turn to when they want to take a loan or a hardship withdrawal, and they don't want their employer to know. Lately, he says, people have been calling him a lot.
"There is a dramatic increase in the requests for hardship withdrawals and/or loans," he says. "Dramatic. Twenty years ago, when I started in this business, if I got a request for a hardship [withdrawal], it was maybe one, two a year." Now, he says, he's receiving three or four a week. Even accounting for the increased volume of his business, McIlhenny says he's astonished by the number of hardship withdrawal calls.
When a plan participant reaches that juncture, McIlhenny says, he tries to determine whether the hardship request is legitimate. "For example, a guy I spoke to last week [said], 'Andy, I've done everything I possibly can, and I need to pay my mortgage because I'm getting foreclosed upon. I have the documentation.' There's no other choice, he needs that."
On the other hand, he says, employees will call him seeking to cash out of their account and immediately request a hardship withdrawal, not realizing that they've got to have documentation such as a foreclosure notice to validate their request.
"I've gotten this call a lot over the past few weeks," he says. For each, he runs through the options and tries to understand what the underlying reasons are. Sometimes, he says, that conversation can help an anxious participant.
"Educate them on what they can do, so they're not taking loans out, and they're not taking hardship withdrawals," he says.
A Total Wellness Plan
To Florence Marino, financial education for employees is no less essential than health education. The executive director of compensation and benefits for Regeneron Pharmaceuticals Inc., a Tarrytown, N.Y.-based biotech firm, Marino says financial health is a central part of the company's wellness plan, along with physical and mental health.
"It all goes together," she says. "You can't have physical and mental health, without considering financial health."
For the company's 875 employees, financial seminars are frequently offered by representatives of Smith Barney, the 401(k) plan administrator. Marino estimates that 80 percent of the employees participate in the company's defined-contribution plan, which matches company stock to the participant's investment.
Marino says most of the employees are young, and Regeneron is continuing to hire employees who tend to be young or come from the academic community.
She says the employees are continuing to contribute, despite the economic climate, for two primary reasons: They're taking the long view of their investments and they want the company stock.
"I think there's a strong belief that something will happen here, and this will be a booming, large pharmaceutical company," she says.
All the same, while hardship withdrawal requests are rare, Marino says "a lot of people take loans" from their plan and only a few are "playing the loan game," in which they submit a loan request, wait until the request is being processed, then make an additional loan request to increase the size of the loan.
"If you continue to take out a loan for a couple of months, you don't have to start paying it [back] for a couple of months," she says.
An unhealthy practice? "Yeah, but it's only a few [months]," she says.
For the most part, Marino says, Regeneron's employees continue to contribute to their plan, but some have been heeding the advice of their Smith Barney representatives, who tell them to gauge their tolerance for risk in the market and invest according to where they want to be in 10 years.
Consequently, they have been shifting their focus from equities toward bonds or other potentially safer investments.
Navigating to a Safe Harbor
Almost every plan includes some form of safe-haven, fixed income funds, says Steven Dimitriou, managing partner at Mayflower Advisors in Boston. Less risky, these funds may also appeal more to workers in their 50s, who are nearing retirement.
But HR shouldn't assume that plan participants know they have the option of shifting their investment strategy toward more conservative, fixed-income funds.
Dimitriou says about half of his business concerns defined-contribution plans. He says he's seen a noticeable uptick in the amount of loan requests over the previous six months, and he suspects the mortgage crisis may lie at the heart of some.
"A lot of people didn't anticipate it, and they didn't budget for it," says Dimitriou.
Some who call his office in a panic are seeking guidance on their options; yet, he says, "the curious thing is that, once they speak to someone, generally, they aren't making any changes."
It's the reassurance many seem to seek, and reinforcement that they do have options.
Dimitriou says he's been working with HR departments to increase his seminars and employee meetings. He stresses the need for HR to be proactive in communicating with and educating employees -- not only about their options in allocating their investments, but also to help quell any sense of panic.
"There's a reason that people typically do better with [a financial] advisor," he says. "And it's because they keep you from acting rashly. No HR person in their right mind will actually give investment advice, but what they can do is make us accessible and remind people to stick to their long-term plans."
Contrasting the findings from SHRM, the Hewitt 401(k) Index shows that loan activity from defined-contribution plans has not increased through 2008.
The index is published by Hewitt Associates, the giant benefits provider that covers more than 17 million employees and their dependents. The index tracks the activity of 1.2 million participants, and about $100 billion in assets.
"It was $120 billion not long ago, but the markets are going down, so the assets go down," says Pamela M. Hess, director of retirement research for the Lincolnshire, Ill.-based consulting firm.
In addition to the Hewitt Index, the firm is also about to publish its 2008 Universe Benchmarks study, a broader survey covering a total of 2.5 million participants. Last published in 2006, this year's study shows flat loan activity, although Hess notes that hardship withdrawals have increased about 15 percent through 2008, compared to a year earlier.
Hess says she's surprised there hasn't been a spike in loan activity throughout the year, considering the easy access to loans in a comparatively tough lending environment.
"I was very surprised to see that people weren't tapping into that, and happy, honestly, that folks are still treating it as a last source of money," she says.
"It's still a retirement savings, so the goal is to continue to use that money for retirement."
On the other hand, while there has been higher-than-average transfer activity away from riskier equity funds into more stable value funds, Hess says the majority of participants seem to be in a holding pattern.
Are they taking a thoughtful wait-and-see approach? It's probably more like inertia, she says.
"I think a lot of people just don't know, [or] they just don't have the time," she says.
And, although she says she's still compiling the data, she suspects plan contributions will fall marginally this year.
Hess thinks many employers have stepped up to help avoid panic among defined-contribution participants.
Whether they're sending out e-mails to point employees to their plan's managers or they're using their intranet to post links for resources and worthwhile news, Hess says, the key to helping them avoid making rash decisions is to communicate with them.
All the same, Hess estimates that calls to Hewitt's benefits center have risen 20 percent since the markets began plummeting.
She notes, however, that more employees are contacting the benefits center with a question they might not want to pass before their employer first.
"The biggest question is about 'What happens if my company fails? Do I get my money out?' So, [the benefits center is] getting a lot of phone calls like that."