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SAN FRANCISCO
— A forthcoming federal report on retirement savings
recommends easing a penalty for hardship withdrawals
from 401(k) plans and that workers receive better
education about the consequences of such decisions.
The
Government Accountability Office
report, slated for release Friday, suggests ways for
Congress
and federal agencies to reduce the long-term impact of
early withdrawals, or "leakage," from
retirement plans.
The
economic downturn has caused many 401(k) participants to
take drastic measures with their retirement accounts.
About one in seven cashes out of a plan after a job
change or loss (without rolling over the money to a new
account), take hardship withdrawals, or borrow against
their portfolio, according to the GAO report.
"Even
small amounts of leakage can have a significant impact
on the retirement savings of some plan
participants," the GAO said.
Some
Washington
lawmakers are concerned that by tapping 401(k) funds for
immediate needs, workers are jeopardizing their
long-term retirement security.
"Americans'
retirement savings have taken a huge hit due to the
recession," said Sen.
Herb Kohl
, D-
Wis.
, chairman of the
Senate's
Special Committee on Aging
, in a written statement. "Despite the financial
hardships many are facing, people need to resist raiding
their 401(k) because it's a really bad deal for them
over the long run."
The GAO
study says
Congress
should consider changing a rule that prohibits 401(k)
participants from making additional contributions for
six months after a hardship withdrawal. The suspension
also includes employer matches.
The
requirement, the GAO report said, may in fact make the
leakage problem worse "by barring otherwise able
participants from contributing to their accounts."
In
addition, the GAO said the
Labor Department
should encourage employers to give workers
"understandable and useful information" about
the adverse long-term consequences from hardship
withdrawals, loans and cash-outs.
Also,
participants could view projections of their account
balances when left in a tax-deferred portfolio versus
the results if they cashed out.
The GAO
also said the
Treasury Department
should clarify 401(k) regulations that require
participants to exhaust all available loans before
resorting to hardship withdrawals that subject workers
to taxes and early-withdrawal penalties.
"Participants
facing sudden and anticipated hardships would also
benefit from the assurance that they are using the most
appropriate and least damaging option," the report
said, "thereby minimizing the negative impacts on
their overall retirement preparedness."
The
year-long study, completed in August, was commissioned
by the
Special Committee on Aging
. The report takes particular aim at cash-outs, noting
it can be "the most damaging form of 401(k)
leakage," is the least regulated, and runs
"counter to the goal of retirement savings."
(In a cash-out, the money is not rolled over to another
retirement account.)
Cash-outs
of any amount — partially or in full — can impact a
participant's account balance at age 65 more than
comparable amounts taken either in a hardship withdrawal
or a loan, the GAO said.
"Participants
who voluntarily cashed out their entire 401(k) account
balance at job separation experienced the largest
reductions in the amount of retirement savings that
accumulate over their working careers," the report
noted.
For
example, a participant who cashed out his entire 401(k)
at age 35 would forfeit more than
$183,000
in savings by his 65th birthday, according to the
report. Cashing out later in a career, when there is
less time to recover from losses, leaves an even bigger
wealth gap.
Yet many
participants choose to cash out of a plan when they
leave a job, in part because they aren't given enough
information about the potential hit to their finances,
the GAO said.
The
report noted: "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."
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