Early withdrawals — loans taken against plan balances, hardship withdrawals and retirement account payouts when changing jobs — can provide participants quick infusions of cash that help meet pressing needs. But these forms of “leakage” can come at the expense of their future retirement security. A new analysis by EBRI provides empirical data on the full impact of leakage on 401(k) balances.
EBRI found that early withdrawals — the bulk of which are the result of distributions taken when an employee terminates — reduce the likelihood of retirees replacing 80% of their income after they stop working regardless of how much an employee makes. It reduces that likelihood by 8.8% for the lowest earners and by for 7.0% for those who earned the most.
EBRI Research Director Jack VanDerhei in June 17, 2014 testimony before the Department of Labor on lifetime participation in plans, said that reducing the availability of early withdrawals — or their elimination — would reverse the ill effects they have had. But he also noted that this result depends on participants not reducing their contributions to their retirement accounts due to their lessened ability to obtain quick cash that they may require for short-term needs.
VanDerhei suggested that legislators and regulators consider whether they would impose restrictions on early withdrawals, or afford plan sponsors the flexibility to determine for themselves how to do that. In addition, he pointed out that any party that restricts early withdrawals consider whether it should apply only to new money, or apply retroactively.
