401(k) Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings

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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 responsible for managing the majority of 401(k) participants and assets.

What GAO Recommends
GAO is suggesting that Congress consider changing the requirement for the 6-month contribution suspension following a hardship withdrawal. In addition, GAO recommends that the Secretary of Labor promote greater participant education on 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. Both agencies agreed to take actions consistent with GAO’s recommendations.
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