Think tank calls for plugging 401(k) leakage

It’s time policymakers consider limiting 401(k) hardship withdrawals to “unpredictable” events like disability, health care emergencies or unemployment.

Also, the age for penalty-free plan withdrawals should be boosted, while lump-sum cash-outs can be eliminated by requiring that retirement assets be left in a plan or rolled over to an IRA.

So says the Center for Retirement Research at Boston College in a paper calling for consideration of these measures in the face of mounting concerns over plan leakage.

Leakage refers to any type of pre-retirement withdrawal that permanently removes money from retirement saving accounts. Over the past few decades, the potential for leakages has greatly increased because of the shift from defined benefit plans to 401(k) plans and the movement of retirement assets from 401(k)s to IRAs.

To make its point, the paper, authored by Alicia Munnell and Anthony Webb, highlighted a hypothetical saver who experiences 1.5 percent in leakage over a 30-year savings career. That saver would see their nest egg depleted by 25 percent, from $272,000 to $203,000, the paper said.

The researchers use data from Vanguard, household surveys and tax data to estimate what percentage of retirement assets leak out of plans annually.

Vanguard’s data shows that 1.2 percent of all assets leak out annually, mostly from cash-outs (0.5 percent) and hardship withdrawals (0.3 percent). 

The fund company’s data is likely conservative, say Munnell and Webb, because it only represents 10 percent of Vanguard clients and represents a pool from larger plans with likely wealthier employees less likely to experience leakage.