The Impact of Leakages on 401(K) Accumulations at Retirement Age

The simulation results for this testimony suggest that, assuming no participant behavior change for participation, contribution or asset allocation resulting from reduced access to 401(k) balances, retirement balances from 401(k) plans, and IRA rollovers originating in 401(k) plans, may be increased substantially for young employees with thirty or more years of eligibility if cashouts at job turnover, hardship withdrawals (and the accompanying suspension of contributions) and plan loan defaults were substantially reduced or eliminated. However, this analysis needs to be accompanied by a very strong caveat that, prior to policy making, there are clear data gaps that will need to be filled. For example, Holden and VanDerhei (2001) found that participants in plans with a loan option have higher contribution rates than those without such access, cet. par. It is likely that a similar relationship exists with respect to the availability of hardship withdrawals. The potential reduction in participation and contribution rates from reducing or eliminating access to cashouts at job change would likely be even greater; however, since this is not a plan design variable that be controlled by the plan sponsor, there is no way to quantify the likely impact based on historical data