A while back, my wife noticed a water spot on the ceiling of our dining room. Now, it didn't look fresh, but considering that that ceiling was directly underneath the master bath, she had the good sense to call a plumber. Sure enough, there was a leaky gasket — and from the look of it, one that had been there for some time before we took ownership. Fortunately, the leak was small, and the damage was minimal. Even more fortunately, we took the time to have the plumber check out the other bathrooms, and found the makings of similar, future problems well before they became serious.
Homes aren't the only place with the potential for problems with leaks. Every so often, you'll see reports that "leakage"— the money being drawn out of retirement plans prior to retirement — is undermining Americans' retirement security.
Is it a problem, and, if so, is it a new problem?
Recommended For You
Late last year, an Employee Benefit Research Institute Issue Brief examined the status of 401(k) loans, noting that in the 2011 EBRI/ICI 401(k) database, 87 percent of participants in that database were in plans offering loans, although as "as has been the case for the 16 years that the database has tracked 401(k) plan participants, relatively few participants made use of this borrowing privilege."
Indeed, from 1996 through 2008, on average, less than one-fifth of 401(k) participants with access to loans had loans outstanding. At year-end 2009, the percentage of participants who were offered loans with loans outstanding ticked up to 21 percent, but it remained at that level at year-end 2010. This hard data, by the way, measured activity by more than 23 million 401(k) participants.
If loan levels and amounts outstanding have remained relatively constant during this period (which included the Great Recession), one might nonetheless wonder about the overall impact on retirement readiness.
Well, if you define "success" as achieving an 80 percent real replacement rate from Social Security and 401(k) accumulations combined, looking at workers ages 25-29 (who will have more than 30 years of simulated eligibility for participation in a 401(k) plan), then the decrease in success resulting from the combination of cash-outs, hardship withdrawals and loans is just 6.1 percent, according to more recent EBRI research.
The impact when you add in the impact of loan defaults is less than 1 percentage point higher, or approximately 7.1 percent for all four factors combined.
Looking at the overall impact another way, more than three-fifths of those in the lowest-income quartile with more than 30 years of remaining 401(k) eligibility will still be able to retire at age 65 with savings and Social Security equal to 80 percent of their real pre-retirement income levels, even when factoring in actual rates of cash-out, hardship withdrawals, and loans — including the impact of loan defaults.
Also read: Hope for demoralized would-be retirees?
The impact at an individual level can, of course, be more severe — something that will be explored by future EBRI research.
There is, however, a potentially larger philosophical issue: whether the utilization of these funds prior to retirement constitutes a "leakage" crisis that cries out for a remedy. We don't know how many participants and their families have been spared true financial hardship in the "here-and-now" by virtue of access to funds they set aside in these programs. Nor do we know that individuals chose to defer the receipt of current compensation specifically for retirement, rather than for interim (but important) savings goals — such as home ownership or college tuition — that make their own contributions to retirement security.
It's hard to know how many of these participants would have committed to saving at all, or to saving at the amounts they chose, if they (particularly the young with decades of work ahead of them) had to balance that against a realization that those monies would be unavailable until retirement.
Like my plumbing problem, retirement plan "leakage," unminded, has the potential to cause damage — to deplete and undermine retirement savings. However, a view that all pre-retirement distributions from these programs are a problem that requires redress not only ignores the law and regulations as written, it also has the potential to create unanticipated changes in savings behaviors.
And the data — based on hard data from actual participant balances and activity — indicate that such concerns are at least somewhat premature.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.