Legislation Aims to SEAL 401(k) “Leakage”

May 18, 2011 ( – Two US Senators have introduced a bipartisan bill designed to cut down on the “leakage” from defined contribution plans due to participant loan practices. 

By Nevin E. Adams | May 18, 2011
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According to a press release, Senators Herb Kohl (D-Wisconsin) and Mike Enzi (R-Wyoming) have introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011, or the SEAL Act, will protect Americans’ retirement savings “by providing flexibility to loan repayment hardship tax rules and limiting the most 401(k) loan practices that provide easy access to retirement funds but adds costs and fees to pension plans”.

“As the frequency of retirement fund loans have gone up, the amount of money people are saving for their retirement has gone down,” Kohl said. “The gap between what Americans will need in retirement and what they will actually have saved is estimated to be a staggering 6.6 trillion dollars. While having access to a loan in an emergency is an important feature for many participants, a 401(k) savings account should not be used as a piggy bank.”

The legislators noted that because of the difficult economic times, more and more Americans are treating their retirement accounts as rainy day funds by taking out withdrawals and loans from their employer sponsored 401(k)’s and then are unable to pay themselves back, a result frequently referred to as “ “leakage.” 

“While our nation’s 401(k) retirement system is providing greater opportunities for individuals to save, there is still room for improvement. Recent studies have shown that money saved in retirement accounts sometimes 'leaks' out of the system and is never put back,” said Senator Mike Enzi (R-Wyoming). “Today, I am joining with Senator Kohl to take the first step to help to stop leakage in the retirement system by introducing legislation to help workers and their families to pay back loans from retirement accounts when a worker leaves a job. Our bill would allow for a greater period of time for the loan to be paid back thereby helping families pay back the loan and allowing the funds to be put back into their retirement savings and avoid the tax penalty.”

According to the press release, this legislative effort is rooted in the findings of a 2009 report by the U.S. Government Accountability Office (GAO) examining the long-term effects of 401(k) loans and leakage on workers’ retirement savings. The report highlighted various policy changes to reduce these effects, urging Congress to take legislative action to change contribution suspension requirements triggered by hardship withdrawals.