When policymakers consider leakages from 401(k) plans, they must balance two conflicting goals: 1) keeping tax-friendly savings in the plan so that funds are available at retirement; And allowing access to participants who need their money, which can encourage greater participation and larger contributions.
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That said, the current setup seems a bit crazy. Participants can withdraw their money in three ways.
401(k) and IRA leaks may be more serious than previously thought
Let’s start with the most favorable assessment. Loans provide the biggest bang for the buck in terms of access to balance. Most of the borrowers continue to contribute to the scheme while taking the loan; And most of the money is repaid. As a result, the expected leakage from loan defaults is very low.
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Difficulty evacuation is understandable as a safety valve for families in financial trouble. However, these withdrawals may be limited to serious unforeseen difficulties such as disability, high health care costs, and job loss. Estimated needs such as housing and higher education can be excluded. With such limits, the 10% tax penalty could be eliminated to avoid penalizing those with serious financial problems.
The really annoying and biggest source of leakages is that people withdraw money when they change jobs. It doesn’t make sense to change jobs to act as a trigger for tapping retirement savings. The problem is that it’s nearly impossible to transfer money from one 401(k) plan to another: Plans are not required to accept impending rollovers; They use different forms and processes; And they don’t face any benchmarks for timeliness and efficiency. Without easy portability, money either gets stuck in smaller accounts, goes into IRAs involuntarily or voluntarily, or more often gets cashed out.
My priority would be to stop cashing in on the job change altogether. At the same time, the Department of Labor needs to push plan sponsors to make 401(k) balances truly portable.
Retirement Clearinghouse LLC Have set up a platform to automatically transfer balances under $5,000 from an old plan to a new plan, but we need a system with standardized forms and procedures for balancing all sizes.
It’s not rocket science, we can do it.