Senate Aging Committee Chair Says GOA Report Shows
Severe Leakage of 401(k) Funds
Sen. Kohl calls committee hearing October 21 on
401(k) reforms suggested by GOA report he requested
Sept. 28, 2009 A report requested from the
Government Accountability Office (GAO) by Sen. Herb Kohl (D-WI) finds
severe leakage from workers 401(k) retirement savings and suggests
action Congress can take to plug the leaks. Kohl, chairman of the Senate
Special Committee on Aging, has called a hearing on October 21, and says
he will introduce new legislation to strengthen the 401(k) system.
The report highlights various policy changes to
reduce the leakage and urges Congress to take legislative action to
change contribution suspension requirements triggered by hardship
withdrawals.
GAO also suggested that the Department of Labor (DOL)
step up its consumer education concerning the preservation of retirement
savings, and that the Department of Treasury improve loan exhaustion
provisions to help participants avoid taking unnecessary hardship
withdrawals.
The report states that both federal agencies are
prepared to follow through with GAO's recommendations.
"Americans' retirement savings have taken a huge
hit due to the recession," said Kohl. "Despite the financial hardships
many are facing, people need to resist raiding their 401(k) because it
can be a really bad deal for them over the long-run."
In explaining the study, the GAO said, 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.
GOA Recommendations
Matter for Congressional Consideration
► To help participants recover more quickly from
a hardship situation, Congress should consider changing the requirement
for the 6-month contribution suspension following a hardship withdrawal.
Recommendations for Executive Action
► To support the goal of providing plan
participants with understandable and useful information about their
employer-provided retirement plan benefits, we recommend that the
Secretary of Labor promote industry best practices by encouraging plans
to take the following actions:
► 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.
► 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.
► To prevent unnecessary leakage and increase
compliance with existing regulatory requirements, we recommend that the
Secretary of the Treasury 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.
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.
The GAO says in the conclusion of the report,
There are many reasons why participants may choose to use their
retirement savings prior to retirement, and some of these choices may
involve a rational trade-off between immediate financial emergencies and
future retirement needs.
U.S. workers continue to feel the effects of the
current economic downturn in the form of job losses, home foreclosures,
and the depreciation of 401(k) retirement savings. With home values down
and lending sometimes difficult to obtain, some workers may see their
accrued 401(k) savings as their last protection against financial
hardship.
Yet, even small amounts of leakage can have a
significant impact on the retirement savings of some plan participants.
While tapping into a 401(k) account to meet
short-term needs may be rational under certain circumstances, some
leakage could be mitigated if participants had adequate information on
the long-term implications of their actions.
Cashouts can be the most damaging form of 401(k)
leakage, are the least regulated, and appear to run counter to the goal
of retirement savings. However, many participants continue to take this
option when separating from their employer, in part because the option
is often presented to them with little or no information on its
long-term consequences. With better information on the consequences of
the various forms of leakage, participants may choose to preserve their
retirement savings, resulting in a better retirement outcome.
In conducting its examination, the GAO was asked to
analyze not only the incidence and significance of different forms of
401(k) leakage, but also how plan administrators inform their 401(k)
participants about provisions pertaining to hardship withdrawals, loans,
and total account withdrawals.
According to the U.S. Census Bureau data, the
report notes that approximately 15 percent of Americans will have some
form of leakage from their retirement accounts. To complete the study,
GAO analyzed federal 401(k) industry data and interviewed government
officials, pension experts, and plan administrators responsible for the
majority of current 401(k) assets and participants.
Senator Kohl has also expressed concerns about the
increased vulnerability of certain groups to leakage.
According to an Ariel/Hewitt study released earlier
this year examining 401(k) savings disparities, African-Americans are
more likely than the overall population to have a taken a loan from
their 401(k) plan, and are more than twice as likely to have taken a
hardship withdrawal. Nearly two of every five African-American workers
and almost a third of Hispanic workers have borrowed from their
retirement accounts, compared to just one in five white workers.
Mellody Hobson, President of Ariel Investments,
stated, "African Americans and Hispanics dramatically trail their white
and Asian counterparts in 401(k) participation and contribution rates.
To make matters worse, African Americans and Hispanics are also more
likely to take loans and withdrawals from their 401(k) plan. Unless
these issues are immediately addressed, African Americans and Hispanics
will retire into poverty and never have the chance to realize the
American dream."
Kohl has been active on the issue of strengthening
401(k) retirement savings. In July 2008, following an
Aging Committee hearing on 401(k) leakage, Senator Kohl and Senator
Charles E. Schumer (D-NY)
introduced legislation to ban companies from linking debit cards to
401(k) accounts. In March of this year, Kohl and Senator Tom Harkin
(D-IA) reintroduced the
Defined Contribution Fee Disclosure Act to require 401(k) plan
providers to disclose all fees so that workers saving for retirement can
make a fully informed decision about which plan is best for them.
Sept. 28, 2009 A report requested from the
Government Accountability Office (GAO) by Sen. Herb Kohl (D-WI) finds
severe leakage from workers 401(k) retirement savings and suggests
action Congress can take to plug the leaks. Kohl, chairman of the Senate
Special Committee on Aging, has called a hearing on October 21, and says
he will introduce new legislation to strengthen the 401(k) system.
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