Plugging leaks in retirement security

Tom Foster

By Tom Foster
E. Thomas Foster Jr. is head of strategic relationships for retirement plans for MassMutual.
Posted on Jun 22, 2019

Fixing leaks in water pipes can be an expensive proposition, costing hundreds of dollars to repair, not including any damage to floors, walls or other building materials. But leaks to retirement plans can be even more costly.

The Government Accountability Office (GAO) recently unveiled a report on “retirement plan leakage,” estimating that Americans between the ages of 25-55 withdrew $69 billion of their retirement savings before retiring in 2013 alone without rolling over the money into another retirement plan. 1 The money and workers’ retirement security were ultimately used for purposes other than retirement.

MassMutual projects the impact of leakage on plans and retirement readiness through its Viability tool. MassMutual helps plan sponsors understand that early withdrawals cause real harm to workers’ ability to retire on time, especially at younger ages, and potentially increase employer’s long-term costs.

For example, a typical 40-year-old worker who is currently on target to retire at age 65 but then borrows 30 percent of the savings in his 401(k) could potentially reduce his retirement readiness by 15 percent and delay his retirement by five years if the loan is not repaid, MassMutual calculates. That decision typically increases an employer’s costs for salaries, health and disability insurance as workers remain in the workforce at older ages.

The impact of behaviors that negatively affect retirement readiness varies with age, MassMutual’s data shows, with younger employees most likely to engage in as well as suffer the most from such activities. MassMutual works closely with financial advisors and plan sponsors to plug leaks and minimize their effect on retirement security. But it’s important to understand the underlying causes.

Researchers at the GAO identified several culprits. Flexibilities in plan rules and individuals’ pressing financial needs, such as out-of-pocket medical costs, are key factors affecting early withdrawals of retirement savings. Certain plan rules, such as setting high minimum loan thresholds, may cause individuals to take out more of their savings than they need. Meanwhile, issues around job separations may encourage early withdrawals, including difficulties transferring account balances to a new plan and plans requiring the immediate repayment of outstanding loans at the termination of employment, the report stated.

“Far too often, Americans in their prime working years are faced with difficult financial circumstances, which can lead them to withdraw retirement savings earlier than expected,” said U.S. Sen. Susan Collins of Maine in the GAO’s news release about the report. Collins, along with Sen. Bob Casey of Pennsylvania, requested the report.

Clearly, improvements can be made. The GAO looked into specific strategies that could help balance early access to retirement accounts with the need to build long-term retirement security.

Retirement plan sponsors told the GAO that allowing individuals to continue to repay plan loans

after job separation would help seal some leaks. Another idea: restricting participant access to plan sponsor contributions.

While the report in part blamed too much flexibility in accessing accounts as a problem, the GAO also said that allowing retirement savers to access a portion of their savings at job separation could encourage participants to conserve more of their retirement nest eggs. Encouraging the inclusion of emergency savings features as part of plan designs could also help, according to the GAO.

The GAO’s emergency savings proposal would allow a portion of a participant’s retirement plan contributions to be directed to a separate emergency savings account. Once a pre-determined threshold is met for emergency savings, subsequent contributions would be directed to the participant’s 401(k) account. If a financial emergency should arise, the participant would be allowed to withdraw money from his or her emergency savings, which would be replenished with future contributions, rather than money earmarked for retirement.

The GAO noted that all of its recommendations involve tradeoffs that must be studied for their long-term effects. Furthermore, the GAO is proposing that plan sponsors be required to report the incidence and amount of early withdrawals that go unrepaid on Form 5500.

There are many worthwhile ideas and initiatives to protect retirement savings being considered by the government as well as by retirement plan providers as more employers and workers wrestle with the impact of early withdrawals on retirement security. Increasingly, recordkeepers are introducing new products and services to create greater financial wellness, build bigger retirement nest eggs and plug retirement plan leaks.

Financial advisors can also put a finger in the dam to prevent leaks by helping educate retirement plan participants on the need to accumulate emergency savings and the pitfalls of making early withdrawals. Working with providers and recordkeepers on implementing financial wellness programs at the workplace may also help.

There is no doubt that leaks can be an expensive proposition, whether from a kitchen faucet or a retirement plan. With coordination from the government, recordkeepers, plan sponsors and financial advisors, it’s possible to plug the leaks in retirement plans. Doing so will undoubtedly help more Americans to enjoy a high and dry retirement.



GAO, “Retirement Savings: Additional Data and Analysis Could Provide Insight into Early Withdrawals,” March 2019.