The Employee-Friendly 403(b) Plan: The Importance of Distribution Flexibility

Authored by Trent Pepper, President & General Counsel

A recent article in Plan Sponsor highlights the reality that more and more retirement plan participants are seeking to tap their retirement accounts to address financial emergencies. According to the article:

The story reflects a broader shift unfolding inside corporate retirement plans.

As inflation continues to pressure household budgets, wage growth struggles to keep pace with living costs, and millions of borrowers are resuming student loan payments, more workers are tapping retirement accounts to stay afloat. At the same time, Congress has expanded their ability to do so. Laws, including the SECURE 2.0 Act of 2022, have given employers new ways to help workers access money from their defined contribution accounts before retirement.

The result is forcing plan sponsors to rethink one of the retirement industry’s oldest assumptions, that preventing “leakage” from retirement accounts before retirement should always be the primary objective.

The SECURE Act and SECURE 2.0 set forth additional means for participants to access their 403(b) funds without penalty, including qualified birth and adoption distributions, domestic abuse distributions, and qualified disaster distributions. These distributions are taxable (unless the distribution is a qualified Roth distribution) but exempt from early distribution penalties.

Aviben has been at the forefront of promoting participant flexibility and choice within the 403(b) space, and its SECURE 2.0 Operational Checklist established a default of allowing each of these distribution types unless an employer elects otherwise. Aviben recognizes that although the primary objective of a 403(b) account is retirement, emergencies occur and these funds do belong to the participant. If the law allows an employee to take a distribution, employers generally want to avoid having to tell that employee that the distribution isn’t permitted without a compelling reason. And “the plan wasn’t designed to allow it” isn’t going to cut it.

The Plan Sponsor article highlights the importance of educating employees on the ramifications of taking money out of their 403(b) accounts while recognizing that emergencies occur and that employees are more likely to contribute to retirement if they know that those funds may be available in a time of need.

Aviben is available to provide education and resources regarding distribution options and how employees can optimize their 403(b) participation.