Great commentary on the proposed SEAL Act to prevent “Leaky 401(k)”:
HOW THE SENATE PROPOSES TO COMBAT PLAN LEAKAGE
On May 18, Sens. Herb Kohl (D-WI) and Mike Enzi (R-WY) introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act (SEAL), an attempt to address the “leakage” issue in retirement plans. In a struggling economy with rising unemployment, workers are bleeding their retirement savings by taking withdrawals and loans and failing to remit payment back to their account. The result is “leakage” or a loss in retirement savings by plan participants tapping into their accounts early. In a 2009 report, the Government Accountability Office (“GAO”) found that approximately 15 percent of participants initiated some form of leakage from their retirement plans. This contributed to a $6.6 trillion gap between what participants have saved for retirement and what they will actually need in their retirement years
The SEAL Act proposes to:
- allow employees to contribute the remaining balance of an outstanding plan loan to their IRA by the time they were required to file the federal income tax return;
- allow employees to make deferral contributions and receive employer matching contributions during the six months subsequent to a hardship withdrawal;
- reduce the number of participant loans allowed at one time to three; and
- prohibit industry products that tend to promote early withdrawals from accounts such as debit cards.
As Plan Sponsors seek greater participation, they find that the flexibility of participants to access their accounts is attractive. However, with flexibility comes the erosion of the potential benefit to employees by the premature removal of some or all of their money. Should the SEAL Act become law, Plan Sponsors would have legislative backing in the attempt to fight this growing problem. However, the SEAL Act is not a cure-all. Plan Sponsors should be pro-active in informing employees of the negative impacts that leakage can have on their retirement savings.
The bill is now with the Senate’s Finance Committee. Sen. Herb Kohl, co-author of the legislation issued a press release commenting,
“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.”
Fiduciary Risk Management: Compliance Services
Sam Henson, JD l Jessica Skinner, JD