Aggregate savings in retirement accounts are growing, with nearly $17 trillion invested in 401(k) plans and IRAs, but billions of dollars continue to leave the retirement system early, the Government Accountability Office said in a recent special report to the Senate’s Special Committee on Aging.
Early access to retirement savings in retirement plans may incentivize participation, increase participant contributions and provide participants with a way to address their financial needs, but it can erode or deplete an individual’s savings, especially if the retirement account represents his or her sole source of savings, the report noted.
GAO was asked to look at the incidence and amount of early withdrawals and what factors might prompt individuals to access their retirement savings early, then to suggest policies and strategies to reduce the incidence and amounts of early withdrawals.
Analysts examined data from IRS, the Census Bureau and the Labor Department from 2013, the most recent complete data set, and interviewed a diverse range of stakeholders.
In 2013, individuals ages 25 to 55 pulled some $69 billion out of their retirement savings early, according to GAO’s analysis. Of this amount, about $40 billion came from IRAs — 3% of this age group’s total IRA assets — and exceeded their IRA contributions in 2013.
Participants in employer-sponsored plans, such as 401(k)s, withdrew at least $29 billion early as hardship withdrawals, lump-sum payments, or “cash-outs” made at job separation and loan balances that borrowers did not repay.
Hardship withdrawals in 2013 amounted to about 0.5% of the age group’s total plan assets and about 8% of their contributions.
GAO was unable to determine the incidence and amount of certain unrepaid plan loans because, it reported, Form 5500 — the federal government’s primary source of information on employee benefit plans — does not capture this data. Plan sponsors are generally required to include, but not itemize, the overall extent of unrepaid plan loans on the form.
As part of its analysis, GAO researchers spoke with a variety of stakeholders, including representatives of 401(k) plan sponsors, plan administrators, subject matter experts, industry representatives and participant advocates.
These stakeholders identified flexibilities in plan rules and individuals’ urgent financial needs, such as out-of-pocket medical costs, as factors affecting early withdrawals of retirement savings. They said certain plan rules, such as setting high minimum loan thresholds, may cause individuals to take out more of their savings than they need.
Interviewees also identified several elements of the job separation process that affect early withdrawals. These included difficulties transferring account balances to a new plan and plans that require immediate repayment of outstanding loans.
Stakeholders suggested several strategies they believed could balance early access to accounts with the need to build long-term retirement savings. Plan sponsors, for example, suggested the following ways to help preserve retirement savings:
- Allowing individuals to continue to repay plan loans after job separation
- Restricting participant access to plan sponsor contributions
- Allowing partial distributions at job separation
- Building emergency savings features into plan designs
Here’s how the emergency savings option would work, according to GAO: A portion of a participant’s 401(k) contribution would be directed to an emergency savings account. When that account’s threshold was met, later contributions would be directed to a 401(k) plan.
The participant could withdraw emergency savings when faced with an economic shock. Afterward, a portion of contributions would again be directed to replenish the emergency savings account.
However, stakeholders pointed out that each strategy involved tradeoffs, and that the strategies’ broader implications required further study.
GAO recommended that as part of revising Form 5500, Labor and the IRS require plan sponsors to report the incidence and amount of all 401(k) plan loans that are not repaid. It noted that DOL and IRS neither agreed nor disagreed with this recommendation.
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