Plan sponsors should examine causes of plan leakage to find potential solutions

“Plan leakage” refers to several types of withdrawals from retirement accounts made prior to normal retirement age and used for nonretirement purposes. Plan leakage can reduce retirement readiness for participants by depleting their retirement savings and potentially triggering additional tax and penalty costs. Plan sponsors may be are negatively affected, as well, since larger retirement plans have more bargaining power to negotiate with investment providers and recordkeepers for less costly investment products and lower fees. Plan sponsors can effectively address asset leakage and help participants help themselves through plan design changes, rollover support, and participant education. 

28% of contributions made by pre-retirement-age individuals leaked in 20151
$9.8B was withdrawn from retirement plans by participants age 25-55 and was not rolled over into another qualified plan or IRA2

What you should know

While the most common reason for plan leakage is leaving a job, it can also be caused by life events including: unemployment/income loss, home purchase, divorce/separation, medical costs, or tuition payments.

Plan design options that can be effective in supporting asset retention include:

  • Limiting permissible reasons for taking hardship withdrawals to only those provided by the IRS safe harbor
  • Allowing no more than one loan at a time to help make repayment to retirement accounts more likely
  • Restricting the type of money available for plan loans (i.e., excluding profit sharing or matching contributions) to reinforce the message that this is money set aside for retirement
  • Requiring automatic loan repayment via payroll deductions

Providing access to emergency savings accounts (ESAs) can help reduce a participant’s need for a loan or hardship withdrawal.

Making the rollover process easier for employees who leave the workplace can encourage asset consolidation and help prevent cash-out leakage.

Robust employee education programs including financial wellness resources can help participants understand the consequences of premature distributions from their retirement accounts through loans, hardship withdrawals, or cash-outs. It is imperative that plan sponsors help participants understand the tax implications of early distributions, and consider encouraging participants to take a plan loan rather than a hardship withdrawal, if needed, as a means to maintaining their plan balance.