The Impact of Leakages from 401(k)s and IRAs

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This paper summarizes what is known about leakages from existing studies and relates these results to detailed data on leakages in 2013 provided by Vanguard’s How America Saves.  It then uses two data sets – the Survey of Consumer Finances (SCF) and the Survey of Income and Program Participation (SIPP) – to estimate the impact of leakages on wealth at retirement. The Vanguard data are a critical component because they provide a comprehensive picture of assets and participant flows, whereas the surveys on which earlier studies were based tended to focus on one component, such as loans.  A key limitation is that Vanguard’s population is probably older and wealthier than the general population.

The paper found that:

  • About 1.5 percent of assets leak out of the 401(k)/IRA system each year.
  • Of the different forms of leakages, in-service withdrawals and cashouts appear to represent the most significant source of leakages, while loans created a measurable but relatively small leakage.
  • Based on our estimates, aggregate 401(k) and IRA retirement wealth is at least 20 percent lower than it would have been without current leakage rules.

The policy implications of the findings are:

  • Hardship withdrawals could be limited to serious, unpredictable hardships and the amounts distributed not subject to the 10-percent penalty.
  • The age for non-penalized withdrawals from both 401(k) and IRAs could be raised to at least Social Security’s Earliest Eligibility Age, which is currently 62.
  • The cash-out mechanism could be closed down entirely, by changing the law to prohibit lump-sum distributions upon termination.