About one-half of all U.S. workers participate in some form of employer- sponsored retirement plan. Only under certain circumstances do federal  regulations allow 401(k) plan sponsors to provide participants with access  to their tax-deferred retirement savings before retirement. In addition, when  separating from their employer, participants may elect to receive a lump- sum distribution of their account balance, or “cash out,” rather than to  preserve the tax-deferred status of their accounts by rolling over their  account into another qualified plan or IRA. Leakage Has Remained Relatively Steady, with Cashouts Having the Greatest Impact on Retirement Savings

		Leakage Has Remained Relatively Steady, Even in the Poor Economy

Our estimates—based on SIPP data collected in 1998, 2003, and 2006— found no statistically significant differences in the overall incidence of  leakage from 401(k) accounts in the data from the three SIPP panels that  we analyzed, with approximately 15 percent of participants between ages  15 and 60 initiating at least one form of leakage. The overall incidence and amounts of leakage from loans and hardship  withdrawals also remained steady through 2008, according to data that we  obtained from selected major 401(k) administrators. Cashouts Can Have the Greatest Impact on Retirement Savings

Cashouts at job separation can have the greatest impact of the principal  forms of leakage on an individual participant’s savings, according to the  results of our analysis. However, few plans that we  contacted had tools on their Web sites for participants to project the  potential impact of cashouts, hardship withdrawals, and loans on their  future retirement savings. Most Plans Informed Participants about the Short-term Costs of Leakage, but Few Informed Participants about the Long-term Implications

Almost all of the plans contacted told us that they sent a termination  package to participants at job separation that outlined the available  options for their account balance, but that these documents did not  contain information on the long-term implications of choosing to take a  cashout. Experts said that the provision requiring participants in 401(k) plans to  exhaust their plan’s loan provisions before taking a hardship withdrawal  had likely reduced leakage by promoting the use of loans that are  generally repaid and returned to the plan. Experts Said That the Provision Requiring Suspension of Contributions May Exacerbate the Long-term Effects of Leakage

Experts noted that the statutory provision requiring a 6-month suspension  of participant contributions following a hardship withdrawal may increase  the amount of leakage by prohibiting those participants who can  contribute to their 401(k) accounts from doing so. GAO staff who made contributions to this report are listed  in appendix V.

Appendix I: Scope and Methodology

The objectives of this study were to identify (1) the incidence, amount,  and relative significance of the different forms of 401(k) leakage; (2) how  401(k) plans inform participants about hardship withdrawal provisions,  loan provisions, and options at job separation, including the short-term  and long-term costs associated with each; and (3) what is known about  how various policies may affect the incidence of 401(k) leakage. To determine the recent prevalence of leakage, we analyzed summary data  on the incidence and amount of hardship withdrawals and loans from 2005  through 2008 that we obtained from major 401(k) plan administrators,  which represented about 22 million 401(k) participants and over $1 trillion  in 401(k) plan assets.
Why GAO Did This Study

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.

What GAO Found

The incidence and amount of the principal forms of leakage from 401(k) plans--that is, cashouts of account balances at job separation that are not rolled over into another retirement account, hardship withdrawals, and loans--have remained relatively steady, with cashouts having the greatest ultimate impact on participants' retirement preparedness. Approximately 15 percent of participants initiated some form of leakage from their retirement plans, according to an analysis of U.S. Census Bureau survey data collected in 1998, 2003, and 2006. In addition, the incidence and amount of hardship withdrawals and loans changed little through 2008, according to data GAO received from selected major 401(k) plan administrators. Cashouts of 401(k) accounts at job separation can result in the largest amounts of leakage and the greatest proportional loss in retirement savings. Most plans that GAO contacted used plan documents, call centers, and Web sites to inform participants of the short-term costs associated with the various forms of leakage, such as the tax and associated penalties. However, few plans provided them with information on the long-term negative implications that leakage can have on their retirement savings, such as the loss of compounded interest and earnings on the withdrawn amount over the course of a participant's career. Experts that GAO contacted said that certain provisions had all likely reduced the overall incidence and amount of leakage, including those that imposed a 10 percent tax penalty on most withdrawals taken before age 59?, required participants to exhaust their plan's loan provisions before taking a hardship withdrawal, and required plan sponsors to preserve the tax-deferred status of accounts with balances of more than $1,000 at job separation. However, experts noted that a provision requiring plans to suspend contributions to participant accounts for 6 months following a hardship withdrawal may exac-erbate the long-term effect of leakage by barring otherwise able participants from contributing to their accounts. GAO also found that some plans are not following current hardship rules, which may result in unnecessary leakage.