NAPA Net » ‘Out’ Takes

NAPA Net » ‘Out’ Takes

Nevin Adams •7/8/14 

My first car wasn’t anything special, other than it was my first car. It was an older model Ford, ran reasonably well, with one small problem — it went through oil almost as quickly as it did gasoline. At first I attributed that to being a function of the car’s age, but as the leakage grew, I eventually dealt with it by keeping a couple of quarts of oil in the trunk “just in case.” Eventually, I took the car to a dealership — but by the time they finished estimating the cost of a head gasket repair, let’s just say that, even on my limited budget, I could buy a lot of oil by the quart, over a long period of time, and still be ahead financially.

“Leakage” — the withdrawal of retirement savings via loan or distribution prior to retirement — is a matter of ongoing discussion among employers, retirement plan advisors, regulators and policy makers alike. In fact, EBRI Research Director Jack VanDerhei was recently asked to present findings on “The Impact of Leakages on 401(k) Accumulations at Retirement Age” to the ERISA Advisory Council in Washington.

EBRI’s analysis considered the impact on young employees with more than 30 years of 401(k) eligibility by age 65 if cashouts at job turnover, hardship withdrawals (and the accompanying six-month suspension of contributions) and plan loan defaults were substantially reduced or eliminated. The analysis assumed automatic enrollment and (as explicitly noted) no behavioral response on the part of participants or plan sponsors if that access to plan balances was eliminated.

Looked at together, EBRI found that there was a decrease in the probability of reaching an 80% real income replacement rate (combining 401(k) accumulations and Social Security benefits) of 8.8 percentage points for the lowest-income quartile and 7.0 percentage points for those in the highest-income quartile. Put another way, 27.3% of those in the lowest-income quartile (and 15.2% of those in the highest-income quartile) who would have come up short of an 80% real replacement rate under current assumptions would reach that level if no leakages are assumed.

The EBRI analysis also looked at the impact of the various types of “leakage” individually. Of loan defaults, hardships and cashouts at job change, cashouts at job change were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included). The leakages from cashouts resulted in a decrease in the probability of reaching an 80% real replacement rate of 5.9 percentage points for the lowest-income quartile and 4.5 percentage points for those in the highest-income quartile.

Advisors take note: that effect from cashouts — not loans or hardship withdrawals — turns out to be approximately two-thirds of the leakage impact.

However, and as the testimony makes clear, it’s one thing to quantify the impact of not allowing early access to these funds — and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes, perhaps by reducing contributions,¹ potentially offsetting some or all of the prospective gains from restricting access to those funds.

Because ultimately, whether you’re dealing with an old car or your retirement savings account, what matters isn’t how much “leaks” out — it’s how much you put in, and how much you have to “run” on.

Footnote

1. An EBRI/ICI analysis published in the October 2001 EBRI Issue Brief found that, “on average, a participant in a plan offering loans appeared to contribute 0.6 percentage point more of his or her salary to the plan than a participant in a plan with no loan provision.” Testimony provided to the ERISA Advisory Council testimony notes that it’s likely that a similar relationship exists with respect to the availability of hardship withdrawals. See “Contribution Behavior of 401(k) Plan Participants,” online here. ↩

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BzzzzAgent

I signed up for BzzAgent https://www.bzzagent.com/member/MemberHome.do . I will now use this blog to discuss the products that we will be using and reviewing. I found that defending the Routan had become boring. Now that it isn't offered anymore, that purpose has gone away.

Welcome to the new blog, once dedicated to singing the praises of the Volkswagen Routan.

Update: we got a new one!

Since I posted last, Volkswagen came to me in October of 2012 and said they could give me a new Routan with no change of payments with a trade-in of my 2009 Routan. I was skeptical, but they did it.

The new Routan is a 2012 SEL in white. We negotiated for running boards on it, which are really useful.

We loved the dark blue Routan, but it was out of warranty and had been in an accident in a parking lot where someone with a trailer hitch backed into the front and pierced the valance panel/bumper cover. My wife had also backed into our mailbox, so there was a dimple on our liftgate.

We made some trade-offs, and there are a few manufacturing differences. The old had Rear Seat Entertainment--where we could play DVDs for the passengers, and there were wireless headphones so you could potentially have two different audio tracks going at a time. When we told the kids that it was going away, they said, "We only used it once or twice a year. No big deal."

Instead, we have Navigation, which is pretty cool. My wife and I have started working in a Chinese ministry. (We're learning Mandarin, but that's a whole different story.) There are about 30,000 Chinese that we identified through public databases, but we often only have a name and street address. The Nav has helped immensely.

Another trade-off is the engine. The old had a 4.0L engine. The new one has a 3.6L engine. I was a little concerned, but have found that the new engine has as much power (both by feel and by spec) as the old, and it delivers better gas mileage. Additionally, we had found that the 4.0L ran better on mid-grade gasoline. In fact, it would through a "Check Engine" light for the first 1/4 tank of regular as well as not run as smoothly. The new engine is perfectly happy with Regular grade gas.

There are some minor changes to the interior. One little irritation is that the old seats were all leather. In the new, some of the seat panels are vinyl. However, all of the other upgrades we got far outstrip that disappointment.

The new one has a sunroof. We missed that in the old, and are happy to have one back. The new one has power folding 3rd row seats. The old had manual seats. And, the new one has a roof rack. In its stowed position, the cross bars nest flatly in the support rails on either side of the roof. When a roof rack is needed, it takes just a little time to loosen the cross rails and fasten them down across the roof.

The killer feature of the new one is remote start/keyless ignition/keyless entry. The remote start turns on the heater and the driver's seat heater in the winter. In the summer, it starts the air conditioner. If you dawdle getting out to the car, it automatically shuts off after maybe 10 minutes.

With the fob in your pocket, you just have to touch the door handle like you're going to open it, and it unlocks all the doors. You can use the fob like a key in the ignition, but they also provide a push button that you install in the ignition notch. As long as the car can sense the fob, it'll start at a push of the button (with your foot on the brake.) To lock the doors from the outside, you push a button on the handle.

We've had the new one for a year and a half and are totally pleased with it. Our Volkswagen dealer did a bang-up job selling the Routan during the 2012 and 2013 model year. We have 4 or 5 Routans in this part of town. I understand why VW got out of the mini-van market, the mini-van is going the way of the station wagon. With all of the grumbling that "it was just a Dodge," I think VW added enough of their own touches and selected the options they offered well, so that the Routan provides a different driving experience compared to Chrysler's products.