GAO Proposes Changes to 401(k) Hardship Withdrawal Rule

By Money Management Executive
September 29, 2009

Noting that 15% of 401(k) participants have engaged in some form of “leakage,” that is, hardship withdrawals from their plans or failure to roll the money over when changing jobs, between 1998 and 2006, the Government Accountability Office is recommending that Congress eliminate the ban on additional contributions for six months by those who make such withdrawals.

“Most plans that GAO contacted used plan documents, call centers, and Web sites to inform participants of the short-term costs associated with the various forms of leakage, such as the tax and associated penalties. However, few plans provided them with information on the long-term negative implications that leakage can have on their retirement savings, such as the loss of compounded interest and earnings on the withdrawn amount over the course of a participant’s career,” GAO said.

Thus, the GAO is asking the Labor Department to encourage plan sponsors to publish information on their 401(k) website about the long-term negative impact of making such withdrawals.

“Despite the financial hardships many are facing, people need to resist raiding their 401(k), because it can be a really bad deal for them over the long run,” said Sen. Herb Kohl (D-Wis.), chairman of the Senate Special Committee on Aging, who requested the GAO report.