By Pension and Benefits Editorial Staff
In 2013, individuals in their prime working years (those ages 25 to 55) removed at least $69 billion of their retirement savings early, according to a recent GAO analysis of IRS and Department of Labor data. The report, Additional Data and Analysis Could Provide Insight into Early Withdrawals, found that the bulk of the leakage—$39.5 billion—was from early withdrawals from individual retirement accounts (IRAs). That represented 3 percent of total IRA holdings and exceeded contributions in that year.
Participants in employer-sponsored plans, such as 401(k) plans, withdrew at least $29.2 billion early as hardship withdrawals, lump-sum payments made at job separation (known as cashouts), and loan balances that borrowers did not repay. Hardship withdrawals in 2013 were equivalent to about 0.5 percent of the age group's total plan assets and about 8 percent of their contributions, the GAO found.
Stakeholders the GAO interviewed identified flexibilities in plan rules and individuals' pressing financial needs, such as out-of-pocket medical costs, as factors affecting early withdrawals of retirement savings. Stakeholders said that certain plan rules, such as setting high minimum loan thresholds, may cause individuals to take out more of their savings than they need. Stakeholders also identified several elements of the job separation process affecting early withdrawals, such as difficulties transferring account balances to a new plan and plans requiring the immediate repayment of outstanding loans, as relevant factors.
Stakeholders the GAO interviewed also suggested strategies they believed could balance early access to accounts with the need to build long-term retirement savings. For example, plan sponsors said allowing individuals to continue to repay plan loans after job separation, restricting participant access to plan sponsor contributions, allowing partial distributions at job separation, and building emergency savings features into plan designs, could help preserve retirement savings. However, they noted, each strategy involves tradeoffs, and the strategies' broader implications require further study.
To further investigate this issue, the GAO recommends that, as part of revising the Form 5500, the DOL and IRS should require plan sponsors to report the incidence and amount of all 401(k) plan loans that are not repaid.
The GAO concluded that “billions of dollars continue to leave the retirement system early. Although these withdrawals represent a small percentage of overall assets in these accounts, they can erode or even deplete an individual's retirement savings, especially if the retirement account represents their sole source of savings.”
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