In 2013, workers in their prime working years, i.e. those between the ages of 25 and 55, removed $69 billion of their retirement savings early, according to a GAO analysis of data from the IRS and the Department of Labor (DOL). The bulk of the leakage was from individual retirement accounts (IRAs), with $39.5 billion being removed from these accounts. That represented 3% of total IRA holdings and exceeded contributions in that year.
The $29.2 worth of withdrawals from employer-sponsored retirement plans came in the form of hardship withdrawals, lump-sum payments made at job separation and loan balances that were not repaid. Hardship withdrawals were the largest source of early withdrawals from 401(k) plans, with 4% of participants between the ages of 25 and 55 taking out $18.5 billion in hardship withdrawals in 2013. This was equivalent to 0.5% of the total assets in 401(k) plans and 8% of total contributions to these plans in 2013.
Cash outs of account balances of $1,000 or more were the second largest source of early withdrawals, with 1.1% of participants between the ages of 25 and 55 withdrawing $9.8 billion of assets that they did not roll into an IRA. Loan defaults accounted for $800 million withdrawn from 401(k) plans in 2013.
The GAO then took a look to see if there were certain demographic and economic characteristics among those cashing out of their plans early. Those between the ages of 45 and 54 took higher IRA withdrawals than younger folks. In addition, those with a high school degree or less were more likely to cash out or take a hardship withdrawal. Families with five to eight members were more likely to take this action, as well as those who were widowed, divorced or separated.
In addition, leakage was more likely among African-American and Hispanic individuals than it was among those who characterized themselves as White, Asian or Other, and the incidence of IRA withdrawals and hardship withdrawals was higher in non-metropolitan areas than among individuals living in metropolitan areas (7% and 6%, respectively).
Individuals working for employers with fewer than 25 employees had a higher incidence of IRA withdrawals (9%), along with those working fewer than 35 hours a week (7%) and those with household debt of $5,000 up to $20,000 (14%).
Those with a household income of less than $50,000 had a higher incidence of IRA withdrawals and hardship withdrawals—as well as those with less than $1,000 in cash reserves (10%), less than $5,000 in retirement assets (7%) and who had participated in their retirement plan for less than three years (6%).
“Stakeholders GAO interviewed identified flexibilities in plan rules and individuals’ pressing financial needs, such as out-of-pocket medical costs, as factors affecting early withdrawals of retirement savings,” according to GAO’s report, “Retirement Savings: Additional data and analysis could provide insight into early withdrawals.” The report says, “Stakeholders said that certain plan rules, such as setting high minimum loan thresholds, may cause individuals to take out more of their savings than they need. Stakeholders also identified several elements of the job separation process affecting early withdrawals, such as difficulties transferring balances to a new plan and plans requiring immediate repayment of loans, as relevant factors.”
Stakeholders said that to mitigate this leakage, sponsors should consider a wide variety of solutions: permitting workers to continue to repay loans after job separation; limiting loan access to only workers’ contributions to their retirement plan, not company matches; building emergency savings features into plan designs; implementing a waiting period after loan repayment before a participant can access a new loan; reducing the number of outstanding loans; making short-term loan programs from third-party vendors available to participants; simplifying the rollover process; eliminating hardship withdrawals, which, unlike loans, are not repaid; and offering financial wellness programs to help employees with budgeting, emergency savings and credit management.
GAO notes that the ability to transfer balances from one retirement plan to another is important, as the DOL’s Bureau of Labor Statistics reported in 2017 that from 1978 to 2014, workers held an average of 12 jobs between the ages of 18 and 50.
GAO concludes that “billions of dollars continue to leave the retirement system early. Although these withdrawals represent a small percentage of overall assets in these accounts, they can erode or even deplete an individual’s retirement savings, especially if the retirement account represents their sole source of savings.”
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