Tuesday, February 3, 2015

New paper: “The Impact of Leakages on 401(k)/ IRA Assets”

The Center for Retirement Research at Boston College has released a new Issue in Brief:

“The Impact of Leakages on 401(k)/IRA Assets”

by Alicia H. Munnell and Anthony Webb

The brief’s key findings are:

  • As 401(k)s and IRAs have become the dominant source of retirement saving, the potential for pre-retirement withdrawals – “leakages” – has grown.
  • Leakages occur via three channels: 1) in-service withdrawals for hardships or after age 59½; 2) cashouts when individuals leave a job; and 3) loans.
  • Estimates indicate that about 1.5 percent of assets leaks out of 401(k)s/IRAs each year, reducing wealth at retirement by about 25 percent.
  • Given the size of leakages, it may be time to take steps to curtail them such as:
    • limiting hardship withdrawals to unpredictable events;
    • raising the age for penalty-free withdrawals to better align with when people actually retire; and
    • closing down cashouts by requiring the money to stay in the 401(k) system or be rolled over into an IRA.
This brief is available here

6 comments:

WilliamLarsen said...

The payroll tax of 15,3% takes a very large chunk of a worker's wages. Is Social Security and Medicare the best way to build wealth? They clearly are in deep doo and have been since their inception. Are these sound investments or are politicians snake oil salesmen?

Why do workers find it necessary to make a hardship with drawl, they are strapped for money. If they had been able to use the 15.3% in a more efficient means, like debt reduction, saving, they may not need a hardship with drawl.

Those who are currently retired saved far more than today's workers do by two or three fold. Today's beneficiaries are receiving far more from their tiny payroll taxes they paid which will not be the case for today's workers.

Has Social Security and Medicare simply been a big Ponzi Scheme in the homes that everything will be just find for everyone?

Now we are having politicians once gain medal in the finances of workers and savers and these same politicians have been unable to balance a single years' General Budget in 57 years.

JoeTheEconomist said...

Andrew,

At this point, I have come to question the merits of RRBC. Who are we kidding. The leakage is fees. I think it was Bogle to stated that at 2%, fees will eat about 70% of your return.

Fees present a serious problems for 401K users. Fees are negotiated by the employer who may have a massive conflict of interest. The disclosure of fees is terrible.

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Anne Morrison said...

Would those recommended steps actually work to curb leakages?

The fees do seem like the real culprit..

Andrew G. Biggs said...

There is some downside to prohibiting leakage, in that the inability to take loans, etc., makes a 401(k) less attractive to people considering starting one. Cutting fees, on the other hand, is pretty much a pure gain to the worker. But I think both are important and worth looking at.

JoeTheEconomist said...

The problem with fees is that vary a lot between employers, and the average person does not have the depth to understand the range of fees nor the access to the information.

If we require 401K record keeping to report a comprehensive fee, the cost of reporting only creates costs that will drive-up fee structures even more.

Fees are negotiated by the employer, not the employee. The employer lacks the incentive to get good rates, and may have a significant conflict of interest. Employees have very little choice in the matter.

Fees are spread-across multiple layers, making the levels of fee opaque.