401(k) Plans
Policy Changes Could Reduce the Long-term Effects of Leakage on Workers' Retirement Savings
GAO-09-715, Sep 25, 2009
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Under federal regulations, 401(k) participants may tap into their accrued retirement savings before retirement under certain circumstances, including hardship. This "leakage" from 401(k) accounts can result in a permanent loss of retirement savings. GAO was asked to analyze (1) the incidence, amount, and relative significance of the different forms of 401(k) leakage; (2) how plans inform participants about hardship withdrawal provisions, loan provisions, and options at job separation, including the short- and long-term costs of each; and (3) how various policies may affect the incidence of leakage. To address these matters, GAO analyzed federal and 401(k) industry data and interviewed federal officials, pension experts, and plan administrators responsi- ble for managing the majority of 401(k) participants and assets.
The incidence and amount of the principal forms of leakage from 401(k) plans--that is, cashouts of account balances at job separation that are not rolled over into another retirement account, hardship withdrawals, and loans--have remained relatively steady, with cashouts having the greatest ultimate impact on participants' retirement preparedness. Approximately 15 percent 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. In addition, the incidence and amount of hardship withdrawals and loans changed little through 2008, according to data GAO received from selected major 401(k) plan administrators. Cashouts of 401(k) accounts at job separation can result in the largest amounts of leakage and the greatest proportional loss in retirement savings. Most plans that GAO contacted used plan documents, call centers, and Web sites to inform participants of the short-term costs associated with the various forms of leakage, such as the tax and associated penalties. However, few plans provided them with information on the long-term negative implications that leakage can have on their retirement savings, such as the loss of compounded interest and earnings on the withdrawn amount over the course of a participant's career. Experts that GAO contacted said that certain provisions had all likely reduced the overall incidence and amount of leakage, including those that imposed a 10 percent tax penalty on most withdrawals taken before age 59?, required participants to exhaust their plan's loan provisions before taking a hardship withdrawal, and required plan sponsors to preserve the tax-deferred status of accounts with balances of more than $1,000 at job separation. However, experts noted that a provision requiring plans to suspend contributions to participant accounts for 6 months following a hardship withdrawal may exac-erbate the long-term effect of leakage by barring otherwise able participants from contributing to their accounts. GAO also found that some plans are not following current hardship rules, which may result in unnecessary leakage.
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Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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Recommendations for Executive Action
Recommendation: To support the goal of providing plan participants with understandable and useful information about their employer-provided retirement plan benefits, the Secretary of Labor should promote industry best practices by encouraging plans to include on their participant Web sites information on their plan loan, hardship withdrawal, and cashout provisions, including examples of the long-term consequences of each provision. For example, plans could place a copy of the summary plan description in an electronic form that participants could reference as needed, or provide modeling tools.
Agency Affected: Department of Labor
Status: Open
Comments: The Department of Labor published, in conjunction with the Department of the Treasury, a Request for Information (RFI) in February 2010 soliciting public input on a variety of issues relating to offering and selection of lifetime income products. The agency conducted two days of public hearings on September 14 and 15, 2010. The agencies are reviewing the almost 800 comments received in response to the RFI and posted them, along with the hearing transcript, on EBSA's website (www.dol.gov/ebsa/regs/cmt-1210-AB33.html). Labor continues to work on the development of proposed individual benefit statement regulations. In FY11, Labor reported that is has an initiative underway to explore steps that it could or should take, by regulation or otherwise, to enhance the retirement security of American workers by facilitating access to, and use of, lifetime income or income arrangements designed to provide a stream of income after retirement. The agency is reviewing the public comments hearing materials to identify areas for further consideration and decide on next steps for action. They will also take into account a GAO report - Retirement Income --Ensuring Income throughout Retirement Requires Difficult Choices (GAO-11-400, June 2010) - as it agency continues to work in this area. Regarding the development of proposed individual benefit statement regulations, the agency and expects the proposed regulation to include provisions relating to lifetime income illustrations in benefit statements provided to participants in 401(k) and similar defined contribution individual account plans.
Recommendation: To support the goal of providing plan participants with understandable and useful information about their employer-provided retirement plan benefits, the Secretary of Labor should promote industry best practices by encouraging plans to provide separating participants with a projection of their account balance under different scenarios, such as when assets are left in a tax-deferred retirement account compared with those assets cashed out in the form of a lump-sum distribution.
Agency Affected: Department of Labor
Status: Open
Comments: The Department of Labor published, in conjunction with the Department of the Treasury, a Request for Information (RFI) in February 2010 soliciting public input on a variety of issues relating to offering and selection of lifetime income products. The agency conducted two days of public hearings on September 14 and 15, 2010. The agencies are reviewing the almost 800 comments received in response to the RFI and posted them, along with the hearing transcript, on EBSA's website (www.dol.gov/ebsa/regs/cmt-1210-AB33.html). Labor continues to work on the development of proposed individual benefit statement regulations. In FY11, Labor reported that is has an initiative underway to explore steps that it could or should take, by regulation or otherwise, to enhance the retirement security of American workers by facilitating access to, and use of, lifetime income or income arrangements designed to provide a stream of income after retirement. The agency is reviewing the public comments hearing materials to identify areas for further consideration and decide on next steps for action. They will also take into account a GAO report - Retirement Income --Ensuring Income throughout Retirement Requires Difficult Choices (GAO-11-400, June 2010) - as it agency continues to work in this area. Regarding the development of proposed individual benefit statement regulations, the agency and expects the proposed regulation to include provisions relating to lifetime income illustrations in benefit statements provided to participants in 401(k) and similar defined contribution individual account plans.
Recommendation: To prevent unnecessary leakage and increase compliance with existing regulatory requirements, the Secretary of the Treasury should clarify that the loan exhaustion provision applies to all plans that permit both participant loans and hardship withdrawals, and require plans to document that participants have exhausted available plan loans before allowing a hardship withdrawal.
Agency Affected: Department of the Treasury
Status: Open
Comments: The IRS's Tax Exempt and Government Entities Division published the "Dos and Dont's of Hardship Withdrawals" in its Fall 2009 Employee Plan News that reminded employers and plan administrators to follow the plan documents and legal requirements before making a hardship distribution. Included in the advice was a reminder to "document, as may be required by the plan, that the employee has exhausted any loans or distributions, other than hardship distributions, that are available from the plan or any other plan of the employer in which the employee participates."
Recommendations for Congressional Consideration
Recommendation: To help participants recover more quickly from a hardship situation, Congress may wish to consider changing the requirement for the 6-month contribution suspension following a hardship withdrawal.
Agency Affected: Congress
Status: Open
Comments: Congress has not taken action on this recommendation.