Congress and federal agencies should take steps to discourage retirement plan participants from withdrawing assets early, according to U.S. Government Accountability Office officials.
The GAO studied the problem of 401(k) plan asset “leakage” at the request of Sen. Herbert Kohl, D-Wis., chairman of the Senate Special Committee on Aging.
About 15% of plan participants have taken or tried to take assets out early, Barbara Bovbjerg, a GAO director, writes in a letter describing the GAO’s findings.
The plan cashouts when workers leave employers tend to cause the most damaging retirement savings losses, Bovbjerg writes. In 2006, for example, retirement plan loan defaults caused leakage of only $561 million of the $2.7 trillion in total retirement plan assets, while hardship withdrawals led to $9 billion in leakage, and job change cashouts led to $74 billion in withdrawals.
Most plans use documents, call centers and websites to describe the short-term costs of leakage, such as taxes and penalties, but few warn about the long-term effects on overall retirement savings, Bovbjerg writes.
The 10% tax penalty on most early withdrawals and a new requirement that employers do something other than simply give balances over $1,000 back to employees when employees leave have probably helped reduce leakage, Bovbjerg writes.
But “a provision requiring plans to suspend contributions to participant accounts for 6 months following a hardship withdrawal may exacerbate the long-term effect of leakage by barring otherwise able participants from contributing to their accounts,” Bovbjerg writes.
The GAO now is suggesting that Congress consider changing the requirement for the 6-month contribution suspension following a hardship withdrawal, Bovbjerg writes. The GAO also is recommending that the Labor Department promote greater participant education on the importance of preserving retirement savings, and that the Treasury Department “clarify and enhance loan exhaustion provisions to ensure that participants do not initiate unnecessary leakage through hardship withdrawals.”
Kohl has scheduled a hearing on strengthening the 401(k) plan system for Oct. 21, and he says he will introduce a leakage-prevention bill.