9.28.2009

gao report: 401(k) Leakage

For the last 9 months or so I have been working on a report about 401(k) leakage. The report was released on Friday and garnered a fair amount of press, which is very exciting. I will let the topic and report speak for the topic: 401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers' Retirement Savings. GAO-09-715, August 26. A one page of report highlights can be read by clicking htis sentence.

From MarketWatch:
"SAN FRANCISCO (MarketWatch) -- A forthcoming federal report on retirement savings recommends easing a penalty for hardship withdrawals from 401(k) plans and that workers receive better education about the consequences of such decisions.

The Government Accountability Office report, slated for release Friday, suggests ways for Congress and federal agencies to reduce the long-term impact of early withdrawals, or "leakage," from retirement plans." (Click here to read more of the article.)

Needless to say I am pretty proud. Good job team leakage.
Posted by harkinna at 7:00 PM
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1 comment:

Bungalow Builder said...

I'm curious who coined the term "leakage" to describe the deliberate choice to divert one's 401(k) funds to alternate investments at a point in time, as in the case of a 401(k) loan or hardship withdrawal. As an amateur plumber and as someone who has taken a 401(k) loan (I'm a "leaker", I guess), I feel that "Leakage" seems to imply that the cause of the leak is a perpetual wearing down of the bucket rather than a deliberate point in time hole in the bucket, and that no one is exactly sure where the leaked contents have gone.
In contrast, however, anytime a person chooses to withdraw from their 401k, it's a deliberate choice to do so. 401k should be viewed as simply another asset pool that should be managed on an ongoing basis. If a better investment opportunity arises, one should weigh that opportunity, and make choices accordingly, being sure to take into consideration the tax implications at the point of withdrawal and payback, and of course, the loss of compounding interest.
I think the real problem with "leakage" in the first place, is that these days, the 401k is the ONLY savings account that many people have. There is no 6-month rainy day fund for hardship, or a bucket of money set aside for home purchases, etc. And between PAYING 24% compounding interest on credit card or home equity loan debt vs. foregoing compounding interst in a 401k, someone facing a hardship who does the math will find that paying off the credit with 401k funds, and then creating a 6-month rainy day fund before reestablishing their 401k is a better way to go.

September 29, 2009 at 12:11 AM

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