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.
Matter for Congressional Consideration
|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.||The bipartisan Shrinking Emergency Account Losses in 401(k) Savings Act (S. 606), referred to the Senate Committee on Finance on 3/19/13, contains a provision that allows employees to continue to contribute to their 401(k) plans during the six months following a hardship withdrawal, a practice currently prohibited.|
Recommendations for Executive Action
|Department of Labor||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.|
|Department of Labor||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.|
|Department of the Treasury||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.|