The Causes and Effects of Leakage from 401(k) Accounts

by Robert Hiltonsmith, The New School for Social Research

Over the past several decades, 401(k)-type plans have replaced defined benefit plans as the most common private-sector retirement plan.  However, there is mounting evidence that these plans may be inadequate: the median household approaching retirement (aged 55 to 64) has $120,000 in retirement savings, enough to purchase an annuity paying just $6,900 annually.  A significant cause of this retirement savings deficit is the 401(k) itself. 401(k)-type plans expose savers to a host of risks and often charge high account management fees; together, the factors make it very difficult for workers to accumulate sufficient retirement assets.

Of these risks, leakage risk has received perhaps the least attention from researchers to date.  The combined impact of leakage on retirement, however, is considerable: in 2010, preretirement withdrawals from 401(k)s and IRAs reduced retirement assets by at least $82.4 billion, effectively offsetting 24.4 percent of all contributions to such accounts that year.  Policies limiting or prohibiting certain types of leakage could reduce its effect on retirement assets, but it might also induce workers to save less in 401(k)s or IRAs, or to shift their savings to other types of assets.

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