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Plan Design
Stem the flow of retirement plan leakage
John Doyle
Senior Retirement Strategist

Employees who tap their retirement plans for loans or hardship withdrawals risk derailing their long-term savings goals. This plan “leakage” reduces aggregate 401(k)/IRA wealth by about 25% at retirement, according to Boston College Retirement Research. Now, some plan sponsors fear that leakage could worsen due to recent legislation and COVID-19-related economic hardships. Here are five action steps that plan sponsors can use to help address the issue.

1. Facilitate emergency savings accounts — A lack of emergency savings fuels leakage. A study from the Secure Retirement Institute found that 23% of households have no emergency savings at all, and only 25% can cover less than three months. They further found that regardless of net worth, those households with lower levels of emergency savings tended to have higher levels of leakage activity — loans, cash outs and hardship withdrawals — related to COVID-19. 

Low emergency savings drives leakage

Percentage increase in DC withdrawals under CARES Act by emergency saving level

This is a bar chart showing the percentage increase in defined contribution withdrawals under the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act. The chart shows CARES-related withdrawals by households’ net worth and emergency savings level. The left two bars show that lower net worth households with less than three months of emergency savings saw a 4% jump in CARES-related leakage, versus just 2% for those with more than 12 months of emergency savings. The right two bars show the trend was similar for higher net worth households. Those households with less than three months in emergency savings saw an 8% rise in leakage versus only a 1% jump for those who had more than 12 months of emergency savings. The source for the chart is Retirement Account Leakage and Emergency Savings: Impact of COVID-19, Secure Retirement Institute, 2020.


The best way to reduce these withdrawals may be to make it easier for participants to save for emergencies. For example, employers could establish a payroll-deduction emergency savings program. 

In an AARP national survey, 71% of employees said they would likely participate in a payroll-deduction emergency savings “rainy day” savings program if their employer offered one.  

2. Give employees guidance — Since the onset of COVID-19, millions of Americans have been driven into unemployment. To provide financial relief, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which increased the amount of loans participants could take from their 401(k)s. Only a fraction of non-retired households with retirement savings have accessed those savings by way of loans, hardship withdrawals, or withdrawals under the terms of the Act, according to the same Secure Retirement Institute survey. But if economic hardship continues, more participants may need to use their 401(k)s for emergency cash.

Plan sponsors can consider giving guidance so participants can make more informed choices based on their circumstances.

3. Allow continuation of loan repayment — Plan sponsors should consider allowing participants to continue to repay loan balances following separation of service. Most plans currently require that outstanding loans be paid back immediately and in full upon separation or they are considered distributions and then taxed and subject to early withdrawal penalties. Extending repayment may prevent leakage and help retain participant assets in plans.

4. Help take the mystery out of rollovers — Leakage is more often unintentional: resulting from a confluence of job changes, small balances and complicated rollover procedures leading to cashouts and even stranded assets. Other times it’s intentional: due to hardship withdrawals or loans for a house, education or life event. Plan sponsors may want to educate departing employees about the advantages of rolling over their assets into their new employer’s plan or into an IRA. Sponsors can also help mitigate leakage by providing necessary roll-in paperwork and guidance to new employees.

5. Support “auto portability” — We suggest that plan sponsors support industry and legislative efforts to provide automatic mechanisms to consolidate, streamline and port over disparate retirement assets for new employees. As we have seen with other DC auto features, the easier we make it for participants to help themselves, the better the outcomes.

While the extent of COVID-19’s impact on America’s retirement readiness is far from clear, it has already begun contributing to leakage, and plan sponsors should be rightly concerned. But there are proactive steps that can be taken to help participants financially affected by the pandemic keep more of their 401(k) assets working towards their future retirements.


John Doyle is a senior retirement strategist with 33 years of experience (as of 12/31/2019). He holds an MBA from the F.W. Olin Graduate School of Business at Babson College and a bachelor’s degree in economics from Georgetown University.


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