The Impact of Leakages on 401(k)/IRA Assets

IB#15-2

The brief’s key findings are:

  • As 401(k)s and IRAs have become the dominant source of retirement saving, the potential for pre-retirement withdrawals – “leakages” – has grown.
  • Leakages occur via three channels: 1) in-service withdrawals for hardships or after age 59½; 2) cashouts when individuals leave a job; and 3) loans.
  • Estimates indicate that about 1.5 percent of assets leaks out of 401(k)s/IRAs each year, reducing wealth at retirement by about 25 percent.
  • Given the size of leakages, it may be time to take steps to curtail them such as:
    • limiting hardship withdrawals to unpredictable events;
    • raising the age for penalty-free withdrawals to better align with when people actually retire; and
    • closing down cashouts by requiring the money to stay in the 401(k) system or be rolled over into an IRA.