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.