Senate Bill Would Limit Retirement Savings 'Leakage'


By Bill Leonard May 24, 2011

Legislation introduced in the U.S. Senate on May 18, 2011, would limit the amount workers can borrow from their retirement savings plans and would give plan participants more time to pay back hardship loans. Sens. Herb Kohl, D-Wis., and Mike Enzi, R-Wyo., co-sponsored the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (SEAL Act), which is designed to stop the retirement savings of U.S. workers from further “leakage.”

“Because of the difficult economic times, more and more Americans are treating their retirement accounts as rainy day funds,” said Kohl in a written statement announcing the introduction of the bill (S. 1020). “A 401(k) savings account should not be used as a piggy bank.”

The proposal would attempt to add protections to retirement savings accounts by creating flexibility to loan repayment rules and by placing limitations on loan practices that offer easy access to retirement funds but add fees to retirement savings plans. If enacted, S. 1020 would reduce the amount and number of loans workers can withdraw from retirement plans and give plan participants more time to repay loans if they lose their jobs. The proposal would allow participants to contribute to their retirement accounts after making a hardship withdrawal and would ban linking debit cards to 401(k) plans.

Enzi and Kohl decided to draft the legislation following a 2009 report by the U.S. Government Accountability Office (GAO), which examined the effects of 401(k) loans and the resulting “leakage” or loss of workers’ retirement savings. The report recommended several policy changes to help reduce the leakage effects and suggested that Congress needed to take legislative action to change contribution suspension rules, which normally are triggered by hardship withdrawals. A written statement issued by Kohl and Enzi also cited a survey conducted by Aon Hewitt that found nearly 28 percent of participants in defined contribution plans had an outstanding loan from their retirement savings accounts.

“While our nation’s retirement system is providing greater opportunities for individuals to save, there is still room for improvement. Recent studies have shown that money saved in retirement accounts sometimes ‘leaks’ out of the system and is never put back,” said Enzi in a written statement. “This is why, I am joining with Senator Kohl to take the first step to help to stop leakage in the retirement system by introducing legislation designed to help workers and their families pay back loans from retirement accounts.”

Bill Leonard is a senior writer for SHRM. ​

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