The Rundown

Increase in hardship withdrawals may have slowed.
Retail investment penetration at credit unions, banks still at less than 1%.
Rethinking of the standard 401(k) plan being considered in recession's aftermath.

Turn the clock back a few years and the scene at some companies went one of two ways.

Matching contributions to employee 401(k) plans had either been scaled way back or completely eliminated as firms looked for ways to rehydrate dry revenue streams to weather the Great Recession years of 2008 and 2009.

Faced with furloughs, unemployment, rising debts and foreclosures, some members at credit unions may have had to make hardship withdrawals from their 401(k)s and other retirement plans. According to the IRS, hardship is defined as immediate and heavy and includes having trouble paying off certain medical expenses, payments to prevent eviction or foreclosure and funeral costs.

After several years of hunkering down, industry anecdotes show that some companies have resumed their retirement plan matching contributions programs. While the national unemployment figure continues to hover around 8%, the housing market is starting to show signs that first-time shoppers may be looking to buy homes as lenders began raising rates again. The same shift can be seen in auto lending as potential borrowers seek out late-year models and new cars to replace their decade-old vehicles.

“The post-financial crisis era has produced mixed results for 401(k) participants,” said Scott Knapp, director of investment strategy for CUNA Mutual Group. “The increase in hardship withdrawals and loans from 401(k) plans has also slowed. Financial markets have nearly recovered losses sustained in the wake of the financial crisis, leading to rising account balances for some participants.”

When financial markets were in free fall a few years ago, many participants transferred assets out of stocks and bonds and into lower-yielding guaranteed accounts, Knapp said. As a result, they missed the recovery, he offered.

“Indeed, they were aggressive when they should have been cautious and cautious when they should have been aggressive,” Knapp said. “This behavior is highly predictable in all market environments. The financial crisis just magnified its negative impact.”

It didn't take a recession to show that credit unions and other financial institutions may not be the top source for members and customers who are looking for help with their long-term financial decisions. According to a new report from the Consumer Federation of America and Primerica Inc., a distributor of financial products to middle-income families, 17% of the 2,015 American surveyed said they would just make their own decisions without seeking any information or advice. Fifteen percent said they would turn to the Internet, publications, or TV.

That same survey showed that middle-class Americans, which are described as those with household incomes between $30,000 and $100,000, were more risk-averse compared to those with incomes over the top end of that threshold. If given $1 million to invest for retirement, 21% said they would invest mainly in a combination of stocks, bonds, or mutual funds. Nineteen percent would choose savings accounts while 25% would invest mainly in real estate.

CFA Executive Director Stephen Brobeck said the researchers were surprised at how infrequently respondents relied on information from the Internet and publications.

While credit unions and banks are offering investment and insurance products to capture the financial advice business of existing customers, how well are they achieving that objective? Kehrer Saltzman & Associates, a Waxhaw, N.C.-based wealth management consulting firm, wanted to find out. Roughly 12.7% of U.S. households reported that they had purchased an investment or insurance product at their primary bank or credit union.

Since the typical financial institution offering investment services has been doing so for 14 or 15 years, this cross sell ratio suggests that banks and credit unions have been penetrating less than one percent of their customer base per year, the firm noted.

Of the households who have purchased an investment or insurance product at their primary bank, 55% or 7% of U.S. households had purchased only one investment and insurance product there.

The remaining 45% or 5.7% purchased more than a single investment or insurance product from a bank and might be considered to have established a financial advice relationship with their primary financial institution, according to Kehrer Saltzman.

While the cross-sell ratio of 45% for building an investment relationship is substantially higher than the 12.7% cross sell ratio for the initial product sale, banks have nonetheless developed an investment or insurance relationship with fewer than one in every 18 of the client households that view them as their primary banking institution.

Meanwhile, the retirement plan industry is rethinking the standard 401(k) plan in the aftermath of the financial crisis, Knapp said. One emerging innovation is the creation of defined benefit plan characteristics in 401(k) plans. Specifically, they are starting to be viewed as personal defined benefit plans that make achievement of reliable income replacement during retirement the plan's ultimate objective, he explained. Sophisticated actuarial and asset/liability management strategies are now starting to find their way into 401(k) plans.

“The goal is to create greater confidence in 401(k) participants' outcomes without transferring investment risk to the employer like a defined benefit plan does. This approach helps make success less contingent on an endlessly rising stock market,” Knapp said.

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