EBRI analyzes impact of “leakage” on 401(k) plan accumulations

New analysis conducted by the Employee Benefit Research Institute (EBRI) for the ERISA Advisory Council has found that “leakage”—preretirement access to 401(k) plan savings by workers, either through loans, hardship withdrawals, or payouts at job change—can have a negative impact on 401(k) plan accumulations (defined as 401(k) account balances plus IRA rollovers originating in 401(k) plans) at age 65.

Using its proprietary Retirement Security Projection Model® (RSPM), the EBRI analysis found that the combined impact of the three primary types of leakage on 401(k) accumulations at age 65 of younger workers with at least 30 years of 401(k) eligibility reduced the probability of reaching an 80% real replacement rate (combining 401(k) accumulations and Social Security benefits) by 8.8 percentage points for the lowest-income quartile and 7.0 percentage points for those in the highest-income quartile. However, the analysis also revealed that approximately two-thirds of that impact was associated with the cashouts that sometimes occur at job change.

Results of EBRI’s modeling were presented by EBRI Research Director Jack VanDerhei at a June 17, 2014 hearing of the ERISA Advisory Council at the U.S. Department of Labor.

The EBRI’s analysis “needs to be accompanied by a very strong caveat that there are clear data gaps that will need to be filled,” VanDerhei cautioned. “For example,” he said, “we have found in previous research that participants in plans with a loan option have higher contribution rates than those without such access, and a similar relationship may exist with respect to the availability of hardship withdrawals. Removing or restricting these plan options would likely reduce levels of 401(k) participation or access, and that could result in a significant drop in retirement savings for some employees eligible for participation in a 401(k) plan.”

Source: EBRI press release PR 1084.

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