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CCH® PENSION — 10/15/09

GAO recommends policy changes to reduce 401(k) plan "leakage"

In a report to the Chairman of the Senate's Special Committee on Aging, the Government Accountability Office (GAO) has recommended several policy changes that could reduce the long-term effects of 401(k) plan "leakage."

The GAO report notes that there are three principal forms of 401(k) plan leakage: (1) cashouts at separation from employment that are not rolled over into another retirement account, (2) hardship withdrawals, and (3) loans. This leakage can result in a permanent loss of retirement savings.

Causes of 401(k) leakage

The incidence and amount of the principal forms of leakage from 401(k) plans have remained relatively steady, the GAO found. Approximately 15% of participants initiated some form of leakage from their retirement plans, according to an analysis of U.S. Census Bureau survey data collected in 1998, 2003, and 2006. The incidence and amount of hardship withdrawals and loans changed little through 2008, according to data the GAO received from selected major 401(k) plan administrators. However, cashouts of 401(k) accounts at job separation can result in the largest amounts of leakage and the greatest proportional loss in retirement savings, the GAO report found.

GAO recommendations

In its report, the GAO suggests that, to help participants recover more quickly from a hardship situation, Congress consider changing the requirement for the 6-month contribution suspension following a hardship withdrawal. Other experts noted that this provision seemed to contradict the goal of creating retirement income. One expert said that the provision unnecessarily kept able participants from making contributions. The expert cited, as an example, an employee who needed an infusion of cash for a discrete, one-time event, such as a home purchase. Other experts characterized the suspension period as excessive and more of an inconvenience than an effective deterrent to taking hardship withdrawals.

In addition, the GAO recommends that the Secretary of Labor promote greater participant education, stressing the importance of preserving retirement savings, and that the Secretary of the Treasury clarify and enhance loan exhaustion provisions to ensure that participants do not initiate unnecessary leakage through hardship withdrawals.

Source: GAO Report, "Policy Changes Could Reduce the Long-Term Effects of Leakage on Workers' Retirement Savings," GAO-09-715 (August 2009)..

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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