SENATOR KOHL RELEASES GAO REPORT ON 401(k) LOANS AND LEAKAGE
Aging Committee to Hold Hearing on October 28
WASHINGTON, D.C. - Today U.S. Senator Herb Kohl (D-WI), chairman of the Senate Special Committee on Aging, released a report by the U.S. Government Accountability Office (GAO) examining long-term effects of 401(k) loans and leakage on workers' retirement savings. The report highlights various policy changes to reduce these effects, urging Congress to take legislative action to change contribution suspension requirements triggered by hardship withdrawals. GAO also suggested that the Department of Labor (DOL) step up its consumer education concerning the preservation of retirement savings, and that the Department of Treasury improve loan exhaustion provisions to help participants avoid taking unnecessary hardship withdrawals. The report states that both federal agencies are prepared to follow through with GAO's recommendations.
"Americans' retirement savings have taken a huge hit due to the recession," said Kohl. "Despite the financial hardships many are facing, people need to resist raiding their 401(k) because it can be a really bad deal for them over the long-run."
In conducting its examination, the GAO was asked to analyze not only the incidence and significance of different forms of 401(k) leakage, but also how plan administrators inform their 401(k) participants about provisions pertaining to hardship withdrawals, loans, and total account withdrawals. According to the U.S. Census Bureau data, the report notes that approximately 15 percent of Americans will have some form of leakage from their retirement accounts. To complete the study, GAO analyzed federal 401(k) industry data and interviewed government officials, pension experts, and plan administrators responsible for the majority of current 401(k) assets and participants.
Senator Kohl has also expressed concerns about the increased vulnerability of certain groups to leakage. According to an Ariel/Hewitt study released earlier this year examining 401(k) savings disparities, African-Americans are more likely than the overall population to have a taken a loan from their 401(k) plan, and are more than twice as likely to have taken a hardship withdrawal. Nearly two of every five African-American workers and almost a third of Hispanic workers have borrowed from their retirement accounts, compared to just one in five white workers.
Mellody Hobson, President of Ariel Investments, stated, "African Americans and Hispanics dramatically trail their white and Asian counterparts in 401(k) participation and contribution rates. To make matters worse, African Americans and Hispanics are also more likely to take loans and withdrawals from their 401(k) plan. Unless these issues are immediately addressed, African Americans and Hispanics will retire into poverty and never have the chance to realize the American dream."
The Aging Committee plans to hold a hearing on October 28 aimed at strengthening the 401(k) system, at which Senator Kohl will introduce legislation to address some of the leakage challenges outlined in the GAO report. Kohl has been active on the issue of strengthening 401(k) retirement savings. In July 2008, following an Aging Committee hearing on 401(k) leakage, Senator Kohl and Senator Charles E. Schumer (D-NY) introduced legislation to ban companies from linking debit cards to 401(k) accounts. In March of this year, Kohl and Senator Tom Harkin (D-IA) reintroduced the Defined Contribution Fee Disclosure Act to require 401(k) plan providers to disclose all fees so that workers saving for retirement can make a fully informed decision about which plan is best for them.
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A copy of the report can be found here: http://www.aging.senate.gov/letters/gao401kleakage.pdf