Retirement Savings: Additional Data and Analysis Could Provide Insight into Early Withdrawals

Federal law encourages individuals to save for retirement through tax incentives for 401(k) plans and IRAs—the predominant forms of retirement savings in the United States. In 2017, U.S. plans and IRAs reportedly held investments worth nearly $17 trillion dollars. Federal law also allows individuals to withdraw assets from these accounts under certain circumstances. DOL and IRS oversee 401(k) plans, and collect annual plan data—including financial information—on the Form 5500. For both IRAs and 401(k) plans, GAO was asked to examine: (1) the incidence and amount of early withdrawals; (2) factors that might lead individuals to access retirement savings early; and (3) policies and strategies that might reduce the incidence and amounts of early withdrawals.

To answer these questions, GAO analyzed data from IRS, the Census Bureau, and DOL from 2013 (the most recent complete data available); and interviewed a diverse range of stakeholders identified in the literature, including representatives of companies sponsoring 401(k) plans, plan administrators, subject matter experts, industry representatives, and participant advocates.

In 2013 individuals in their prime working years (ages 25 to 55) removed at least $69 billion (+/- $3.5 billion) of their retirement savings early, according to GAO's analysis of 2013 Internal Revenue Service (IRS) and Department of Labor (DOL) data. Withdrawals from individual retirement accounts (IRA)—$39.5 billion (+/- $2.1 billion)—accounted for much of the money removed early, were equivalent to 3 percent (+/- 0.15 percent) of the age group's total IRA assets, and exceeded their IRA contributions in 2013. Participants in employer-sponsored plans, like 401(k) plans, withdrew at least $29.2 billion (+/- $2.8 billion) early as hardship withdrawals, lump sum payments made at job separation (known as cashouts), and loan balances that borrowers did not repay. Hardship withdrawals in 2013 were equivalent to about 0.5 percent (+/-0.06 percent) of the age group's total plan assets and about 8 percent (+/- 0.9 percent) of their contributions. However, the incidence and amount of certain unrepaid plan loans cannot be determined because the Form 5500—the federal government's primary source of information on employee benefit plans—does not capture these data.

Stakeholders GAO interviewed identified flexibilities in plan rules and individuals' pressing financial needs, such as out-of-pocket medical costs, as factors affecting early withdrawals of retirement savings. Stakeholders said that certain plan rules, such as setting high minimum loan thresholds, may cause individuals to take out more of their savings than they need. Stakeholders also identified several elements of the job separation process affecting early withdrawals, such as difficulties transferring account balances to a new plan and plans requiring the immediate repayment of outstanding loans, as relevant factors.

Stakeholders GAO interviewed suggested strategies they believed could balance early access to accounts with the need to build long-term retirement savings. For example, plan sponsors said allowing individuals to continue to repay plan loans after job separation, restricting participant access to plan sponsor contributions, allowing partial distributions at job separation, and building emergency savings features into plan designs, could help preserve retirement savings (see figure). However, they noted, each strategy involves tradeoffs, and the strategies' broader implications require further study.

GAO recommends that, as part of revising the Form 5500, DOL and IRS require plan sponsors to report the incidence and amount of all 401(k) plan loans that are not repaid. DOL and IRS neither agreed nor disagreed with our recommendation.

Federal law encourages U.S. workers to save for retirement by  authorizing tax incentives for the predominant forms of retirement savings  in the United States—employer-sponsored defined contribution (DC)  plans like 401(k) plans and individual retirement accounts (IRA). In 2017,  DC plans and IRAs reportedly held investments worth nearly $17 trillion  dollars. Federal law also allows workers to access assets in employer- sponsored 401(k) plans before retirement under certain circumstances,  such as financial hardship. Early access to retirement savings has been  shown to benefit participants by encouraging plan participation,  increasing participant contributions, and providing participants with a  means of addressing their financial needs. Additionally, IRA owners can  take a distribution from their IRA at any time for any reason. While such  withdrawals occur for various reasons and can help workers facing  financial difficulties, they can also affect a worker’s long-term retirement  security by reducing account assets and subjecting withdrawn amounts to  additional taxation.

You asked us to examine various aspects of early withdrawals of  retirement savings from both IRAs and 401(k) plans. This report  examines: (1) the incidence and amount of retirement savings being  withdrawn early; (2) what is known about the factors that might lead  individuals to access their retirement savings early; and (3) what  strategies or policies, if any, might reduce the incidence and amount of  early withdrawals of retirement savings.

To examine the incidence and amount of early withdrawals from IRAs and  401(k) plans, we analyzed the most recent nationally representative data  available from three relevant federal sources focusing on individuals ages  25 to 55, when possible. First, to examine recent incidence and amounts  of IRA withdrawals and tax consequences of withdrawal, we analyzed  published statistics from the Internal Revenue Service (IRS) for 2013.  Second, to examine the incidence and amount of early withdrawals from  401(k) plans, we analyzed the most recently available data on individuals  collected in 2013 for the 2014 panel of the U.S. Census Bureau’s Survey  of Income and Program Participation (SIPP), along with its Social Security  Administration (SSA) supplement. Third, to examine the incidence and  amount of participant loans not paid back to a plan (i.e., plan loans), we  analyzed annual plan data from 2013 reported to the Department of Labor  (DOL) on the Form 5500. We determined that the data from these three  sources were sufficiently reliable for the purposes of our report. To learn  what is known about factors that lead to early withdrawals, and possible  strategies or policies that could reduce early withdrawals, we conducted  site visits in four metropolitan areas—Boston, Chicago, San Francisco,  and Seattle—and interviewed a diverse sample of stakeholders identified  in the literature, including human resource professionals at companies  sponsoring 401(k) plans, administrators of large and small plans, subject  matter experts; industry representatives; and participant advocates. For  more information on the methodology used in developing this report, see  appendix I.

We conducted this performance audit from October 2017 to March 2019  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Over the last 3 decades employers have shifted away from sponsoring  defined benefit (DB) plans and toward DC plans. This shift also transfers  certain types of risk—such as investment risk—from employers to  employee participants. DB plans generally offer a fixed level of monthly  annuitized retirement income based upon a formula specified in the plan,  which usually takes into account factors such as a participant’s salary,  years of service, and age at retirement, regardless of how the plan’s  investments perform. In contrast, benefit levels in DC plans—such as  401(k) plans—depend on the contributions made to the plan and the  performance of the investments in individual accounts, which may  fluctuate in value. As we have previously reported, some experts have  suggested that the portability of DC plans make them better-suited for a  mobile workforce, and that such portability may lead to early withdrawals  of retirement savings. DOL reported there were 656,241 DC and 46,300  DB plans in the United States in 2016.

Tax incentives are in place to encourage employers to sponsor retirement  plans and employees to participate in plans. Under the Employee  Retirement Income Security Act of 1974 (ERISA), employers may  sponsor DC retirement plans, including 401(k) plans—the predominant  type of DC plan, in which benefits are based on contributions to and the  performance of the investments in participants’ individual accounts. To  save in 401(k) plans, participants contribute a portion of their income into  an investment account, and in traditional 401(k) plans taxes are deferred  on these contributions and associated earnings, which can be withdrawn  without penalty after age 59½ (if permitted by plan terms). As plan  sponsors, employers may decide the amount of employer contributions (if  any) and how long participants must work before having a non-forfeitable  (i.e., vested) interest in their plan benefit, within limits established by  federal law. Plan sponsors often contract with service providers to  administer their plans and provide services such as record keeping (e.g.,  tracking and reporting individual account contributions); investment  management (i.e., selecting and managing the securities included in a  mutual fund); and custodial or trustee services for plan assets (e.g.,  holding the plan assets in a bank).

Individuals also receive tax incentives to save for retirement outside of an  employer-sponsored plan. For example, traditional IRAs provide certain individuals with a way to save pre-tax money for retirement, with  withdrawals made in retirement taxed as income. In addition, Roth IRAs  allow certain individuals to save after-tax money for retirement with  withdrawals in retirement generally tax-free. IRAs were established  under ERISA, in part, to (1) provide a way for individuals not covered by a  pension plan to save for retirement; and (2) give retiring workers or  individuals changing jobs a way to preserve assets from 401(k) plans by  transferring their plan balances into IRAs. The Investment Company  Institute (ICI) reported that 34.8 percent of households in the United  States owned an IRA in 2017, a percentage that has generally remained  stable since 2000. In 2017, IRA assets accounted for almost 33 percent  (estimated at $9.2 trillion) of total U.S. retirement assets, followed by DC  plans, which accounted for 27 percent ($7.7 trillion). Further, according  to ICI, over 94 percent of funds flowing into traditional IRAs from 2000 to  2015 came from rollovers—primarily from 401(k) plans.

IRS, within the Department of the Treasury, is responsible for enforcing  IRA tax laws, while IRS and DOL share responsibility for overseeing  prohibited transactions relating to IRAs. IRS also works with DOL’s  Employee Benefits Security Administration (EBSA) to enforce laws  governing 401(k) plans. IRS is primarily responsible for interpreting and  enforcing provisions of the Internal Revenue Code (IRC) that apply to tax- preferred retirement savings. EBSA enforces ERISA’s reporting and  disclosure and fiduciary responsibility provisions, which, among other  things, include requirements related to the type and extent of information  that a plan sponsor must provide to plan participants.

Employers sponsoring employee benefit plans subject to ERISA, such as  a 401(k) plans, generally must file detailed information about their plan  each year. The Form 5500 serves as the primary source of information  collected by the federal government regarding the operation, funding,  expenses, and investments of employee benefit plans. The Form 5500  includes information about the financial condition and operation of their  plans, among other things. EBSA uses the Form 5500 to monitor and  enforce plan administrators and other fiduciaries, and service providers’  responsibilities under Title I of ERISA. IRS uses the form to enforce  standards that relate to, among other things, how employees become  eligible to participate in benefit plans, and how they become eligible to  earn rights to benefits.

Permitted Early Withdrawals of Retirement Savings

In certain instances, sponsors of 401(k) plans may allow participants to  access their tax-preferred retirement savings prior to retirement. Plan  sponsors have flexibility under federal law and regulations to choose  whether to allow plan participants access to their retirement savings prior  to retirement and what forms of access to allow. Typically, plans allow  participants to access their savings in one or more of the following forms:

Loans: Plans may allow participants to take loans and limit the  number of loans allowed. If the plan provides for loans, the maximum  amount that the plan can permit as a loan generally cannot exceed  the lesser of (1) the greater of 50 percent of the vested account  balance, or $10,000 or (2) $50,000 less the excess of the highest  outstanding balance of loans during the 1-year period ending on the  day before the day on which a new loan is made over the outstanding  balance of loans on the day the new loan is made. Plan loans are  generally not treated as early withdrawals unless they are not repaid  within the terms specified under the plan.

Hardship withdrawals: Plans may allow participants facing a hardship  to take a withdrawal on account of an immediate and heavy financial  need, and if the withdrawal is necessary to satisfy the financial  need. Though plan sponsors can decide whether to offer hardship  withdrawals and approve applications for hardship withdrawals, IRS  regulations provide “safe harbor” criteria regarding circumstances  when a withdrawal is deemed to be on account of an immediate  heavy financial need. IRS regulations allow certain expenses to  qualify under the safe harbor including: (1) certain medical expenses;  (2) costs directly relating to the purchase of a principal residence; (3)  tuition and related educational fees and expenses for the participant,  and their spouse, children, dependents or beneficiary; (4) payments  necessary to prevent eviction from, or foreclosure on, a principal  residence; (5) certain burial or funeral expenses; and (6) certain  expenses for the repair of damage to the employee’s principal  residence. Plans that provide for hardship withdrawals generally  specify what information participants must provide to the plan sponsor  to demonstrate a hardship meets the definition of an immediate and  heavy financial need.

Early withdrawals of retirement savings may have short-term and long- term impacts on participants’ ability to accumulate retirement savings. In  the short term, IRA owners and participants in 401(k) plans who received  a withdrawal before reaching age 59½ generally pay an additional 10  percent tax for early distributions in addition to income taxes on the  taxable portion of the distribution amount. The IRC exempts certain  distributions from the additional tax, but the exceptions vary among  401(k) plans and IRAs. Early withdrawals of any type can result in the  permanent removal of assets from retirement accounts thereby reducing  the amounts participants can accumulate before retirement, including the  loss of compounded interest or other earnings on the amounts over the  participant’s career.

Disposition of Account Balances at Job Separation

According to DOL’s Bureau of Labor Statistics (BLS), U.S. workers are  likely to have multiple jobs in their careers as average employee tenure  has decreased. In 2017, BLS reported that from 1978 to 2014, workers  held an average of 12 jobs between the ages of 18 and 50. BLS also  reported in 2016 that the median job tenure for a worker was just over 4  years.

Employees who separate from a job bear responsibility for deciding what  to do with their accumulated assets in their former employer’s plan.  Recent research estimated that 10 million people with a retirement plan  change jobs each year, many of whom faced a decision on how to treat  their account balance at job separation. Plan administrators must  provide a tax notice detailing participants’ options for handling the  balance of their accounts. When plan participants separate from their  employers, they generally have one of three options:  1.  They may leave the balance in the plan,  2.  They may ask their employer to roll the money directly into a new  qualified employer plan or IRA (known as a direct rollover), or  3.  They may request a distribution. Once the participant receives the  distribution he or she can (1) within 60 days, roll the distribution into a  new qualified employer plan or IRA (in which case the money would  remain tax-preferred); or (2) keep the distributed amount, and pay any  income taxes or additional taxes associated with the distribution  (known as a cashout).

Sponsors of 401(k) plans may cash out or transfer separating participant  accounts if an account balance falls below a certain threshold. The  Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)  amended the IRC to provide certain protections for separating  participants with account balances between $1,000 and $5,000 by  requiring, in the absence of participant direction, plan sponsors to either  keep the account in the plan or to transfer the account balance to an IRA  to preserve its tax-preferred status. Plan sponsors may not distribute  accounts with balances of more than $5,000 without participant direction,  but have discretion to distribute account balances of $1,000 or less.

Additional Tax Consequences for Early Withdrawals

The IRC imposes an additional 10 percent tax (in addition to ordinary  income tax) on certain early withdrawals from qualified retirement plans,  which includes IRAs and 401(k) plans in an effort to discourage the use of  plan funds for purposes other than retirement and ensure the favorable  tax treatment for plan funds is used to provide retirement income.  Employers are required to withhold 20 percent of the amount cashed out  to cover anticipated income taxes unless the participant pursues a direct  rollover into another qualified plan or IRA.

Employee Financial Literacy and Financial Wellness

Research has found that many employees are concerned about their  level of savings and ability to manage their retirement accounts, and  some employers provide educational services to improve employees’  financial wellness and financial literacy and encourage them to save for retirement. A 2017 survey on employee financial wellness in the  workplace found more than one-half of workers experienced financial  stress and that insufficient emergency savings was a top concern for  employees. Research has also found that limited financial literacy is  widespread among Americans over age 50, and those who lack financial  knowledge are less likely to successfully plan for retirement. In 2018,  the Federal Reserve reported that three-fifths of non-retirees with  participant-directed retirement accounts had little to no comfort managing  their own investments. As we have previously reported, some  employers have developed comprehensive programs aimed at overall  improvement in employees’ financial health. These programs, often called  financial wellness programs, may help employees with budgeting,  emergency savings, and credit management, in addition to the traditional  information and assistance provided for retirement and health benefits.

At Least $69 Billion Dollars in 2013 Left Retirement Accounts Early, Mostly from Individual Retirement Accounts

In 2013, individuals ages 25 to 55 withdrew at least $68.7 billion early  from their retirement accounts. Of this amount, IRA owners in this age  group withdrew the largest share (about 57 percent) and 401(k) plan  participants in this age group withdrew the rest (about 43 percent)  However, a total amount withdrawn from 401(k) plans cannot be  determined due to data limitations.

Nearly $40 Billion Withdrawn Early from IRAs in 2013

IRA withdrawals were the largest source of early withdrawals of  retirement savings, accounting for an estimated $39.5 billion of the total  $68.7 billion in early withdrawals made by individuals ages 25 to 55 in  2013. According to IRS estimates, 12 percent of IRA owners in this age  group withdrew money early that year from their IRAs in 2013. The  amount they withdrew early comprised a small percentage of their total  IRA assets. Specifically, in 2013, the amount of early withdrawals was  equivalent to 3 percent of the cohort’s total IRA assets and, according to  IRS estimates, the total amount withdrawn by this cohort exceeded their  total contributions to IRAs in that year.

At Least $29 Billion Withdrawn Early from 401(k) Plans in 2013

At least $29.2 billion left 401(k) plans in 2013 in the form of hardship  withdrawals, cashouts at job separation, and unrepaid plan loans,  according to our analysis of 2013 SIPP data and data from DOL’s Form  5500. Specifically, we found that:

Hardship withdrawals were the largest source of early withdrawals  from 401(k) plans with an estimated 4 percent (+/- 0.25) of plan  participants ages 25 to 55 withdrawing an aggregate $18.5 billion in  2013. The amount of hardship withdrawals was equivalent to 0.5  percent (+/- 0.06) of the cohort’s total plan assets and 8 percent (+/-  0.9) of the cohort’s plan contributions made in 2013.

Cashouts of account balances of $1,000 or more at job separation  were the second largest source of early withdrawals from 401(k)  plans. In 2013, an estimated 1.1 percent (+/- 0.11) of plan participants  ages 25 to 55 withdrew an aggregate $9.8 billion from their plans that  they did not roll into another qualified plan or IRA. Additionally, 86  percent (+/- 2.9) of these participants taking a cashout of $1,000 or  more did not roll over the amount in 2013. The amounts cashed out  and not rolled over were equivalent to 0.3 percent (+/- 0.05) of the  cohort’s total plan assets and 4 percent (+/- 0.75) of the cohort’s total  contributions made in 2013.

Loan defaults accounted for at least $800 million withdrawn from  401(k) plans in 2013; however, the amount of distributions of unpaid  plan loans is likely larger as DOL data cannot be used to quantify plan  loan offsets that are deducted from participants’ account balances  after they leave a plan. As a result, the amount of loan offsets among  terminating participants ages 25 to 55 cannot be determined with  certainty. Specifically, DOL’s Form 5500 instructions require plan  sponsors to report unpaid loan balances in two separate places on the  Form 5500, depending on whether the loan holder is an active or a  terminated participant. For active participants, plan sponsors report  loan defaults as a single line item on the Form 5500 (i.e., the $800  million in 2013 listed above). For terminated participants, plan  sponsors report unrepaid plan loan balances as benefits paid directly  to participants—a category that also includes rollovers to employer  plans and IRAs. According to a DOL official, as a result of this  commingling of benefits on this line item, isolating the amount of loan  offsets for terminated participants using the Form 5500 data is not  possible. Without better data of the amount of unrepaid plan loans,  the amount of loan offsets and the characteristics of plan participants  who did not repay their plan loans at job separation cannot be  determined.

Additional Tax Consequences of Early Withdrawals Also Contributed to Reductions in Overall Savings

IRA owners and plan participants taking early withdrawals paid $6.2  billion as a result of the additional 10 percent tax for early distributions in  2013, according to IRS estimates. Although the taxes are generally  treated separately from the amounts withdrawn, IRA owners and plan  participants are expected to pay any applicable taxes resulting from the  additional 10 percent tax when filing their income taxes for the tax year in  which the withdrawal occurred.

Certain Characteristics Were Associated With Higher Incidence of Early Withdrawals

Individuals with certain demographic and economic characteristics that  we analyzed had higher incidence of early withdrawals of retirement  savings, according to our analysis of SIPP data. The characteristics  described below reflect statistically significant differences between  comparison groups (a full listing of all demographic groups can be found  in appendix III).

Age. The incidence of IRA withdrawals was higher among individuals  ages 45 to 54 (8 percent) than individuals ages 25 to 34 and 35 to 44.

Education. Individuals with a high school education or less had higher  incidence of cashouts (97 percent) and hardship withdrawals (7  percent) than individuals with some college or some graduate school  education.

Family size. Individuals in families of seven or more (8 percent) or in  families of five to six (7 percent) had higher incidence of hardship  withdrawals than individuals in smaller family groups we analyzed.  Individuals living alone had higher incidence of IRA withdrawals than  individuals living in the larger family groups.

Marital status. Widowed, divorced, or separated individuals had higher  incidence of IRA withdrawals (11 percent) and hardship withdrawals  (7 percent) than married or never married individuals.

Race. The incidence of hardship withdrawals among African American  (10 percent) and Hispanic individuals (6 percent) was higher than  among individuals who were White, Asian, or Other.

Residence. The incidence of IRA withdrawals and hardship  withdrawals was higher among individuals living in nonmetropolitan  areas (7 percent and 6 percent, respectively) than among individuals  living in metropolitan areas.

Similarly, individuals with certain economic characteristics that we  analyzed had higher incidence of early withdrawals of retirement savings,  according to our analysis of SIPP data. The characteristics described  below reflect statistically significant differences between comparison  groups (a full listing of all demographic groups can be found in appendix  III).

Employer size. Individuals working for employers with fewer than 25  employees had higher incidence of IRA withdrawals (9 percent) than  individuals working for employers with higher number of employees.

Employment. Individuals working fewer than 35 hours per week had  higher incidence of IRA withdrawals (7 percent) than employees  working 35 hours or more.

Household debt. Individuals with household debt of $5,000 up to  $20,000 had higher incidence of IRA withdrawals (14 percent) than  individuals with other debt amounts.

Household income. Individuals with household income of less than  $25,000 or $25,000 up to $50,000 had higher incidence of IRA  withdrawals (12 percent and 9 percent, respectively) and hardship  withdrawals (9 percent and 7 percent, respectively) than individuals  with higher income amounts.

Personal cash reserves. Individuals with personal cash reserves of  less than $1,000 had higher incidence of IRA withdrawals (10 percent)  and hardship withdrawals (6 percent) than individuals with larger  reserves.

Retirement assets. Individuals with combined IRA and 401(k) plan  assets valued at less than $5,000 had higher incidence of hardship  withdrawals (7 percent) than individuals with higher valued assets.

Tenure in retirement plan. Individuals with fewer than 3 years in their  retirement plan had higher incidence of hardship withdrawals (6  percent) than individuals with longer tenures.

Plan Rule Flexibilities and Use of Retirement Assets for Pressing Financial Needs Said to Result in Early Withdrawals

Stakeholders Said Plan Rules Governing Early Withdrawals May Lead to Reduced Savings for Some Participants

Stakeholders we interviewed said that plan rules related to the disposition  of account balances at job separation can lead participants to remove  more than they need, up to and including their entire balance. We  previously reported U.S. workers are likely to change jobs multiple times  in a career. Plan sponsors may cash out balances of $1,000 or less at  job separation, although they are not required to do so. As a result, plan  participants with such balances, including younger employees and others  with short job tenures, risk having their account balances distributed in full  each time they change jobs. As shown in table 1, a separating  employee must take multiple steps to ensure that an account balance  remains tax-preferred.

Participants who take a distribution from a plan with the intent of rolling it  into another qualified plan or IRA must acquire additional funds to  complete the rollover and avoid adverse tax consequences. Plan  sponsors are required to withhold 20 percent of the account balance to  pay anticipated taxes on the distribution. As a result, the sponsor then  sends 80 percent of the account balance to the participant, who must  acquire outside funds to compensate for the 20 percent withheld or forgo  the preferential tax treatment of that portion of their account balance. For  example, a participant seeking to roll over a retirement account with a  $10,000 balance would receive an $8,000 distribution after tax  withholding, requiring them to locate an additional $2,000 to complete the  rollover within the 60-day period to avoid a taxable distribution of the  withheld amount. If participants can replace the 20 percent withheld and  complete the rollover within the 60-day period, they do not owe taxes on  the distribution.

Stakeholders said that the complexity of rolling a 401(k) account balance  from one employer to another may encourage participants to take the  relatively simpler route of rolling their balance into an IRA or cashing out  altogether. They noted that separating participants had many questions  when evaluating their options and had difficulty understanding the notice  provided. For example, participants may not fully understand how the  decisions made at job separation can have a significant impact on their  current tax situation and eventual retirement security. One plan sponsor,  describing concerns about giving investment advice, said she watched  participants make what she judged to be poor choices with their account  balances and felt helpless to intervene. Stakeholders also noted that the  lack of a standardized rollover process sometimes bred mistrust among  employers and complicated separating participants’ ability to successfully  facilitate a rollover between plans. For example, one stakeholder told us  that some plans were hesitant to accept funds from other employer plans  fearing that the funds might come from plans that have failed to comply  with plan qualification requirements and could create problems for the  receiving plan later on. Another stakeholder suggested that the  requirement for plan sponsors to provide a notice to separating  participants likely caused more participants to take the distribution.

Stakeholders described loans as a useful source of funds in times of need  and a way to avoid more expensive options, such as high-interest credit cards. They also noted that certain plan loan policies could lead to early  withdrawals of retirement savings. (See fig. 1.)

Loan repayment at job separation: Stakeholders said loan repayment  policies can increase the incidence of defaults on outstanding loans.  When participants do not repay their loan after separating from a job,  the outstanding balance is treated as a distribution, which may subject  it to income tax liability and, possibly, an additional 10 percent tax for  early distributions. According to stakeholders, the process of changing  jobs can inadvertently lead to a distribution of a participant’s  outstanding loan balance, when the participant could have otherwise  repaid the loan.

Extended loan repayment periods: Some plan sponsors allow  participants to take loans to purchase a home. Stakeholders told us  that the amounts of these home loans tended to be larger than  general purpose loans and had longer repayment periods that these  extended from 15 to 30 years. A stakeholder further noted that these  loans could make it more likely that participants would have larger  balances to repay if they lost or changed jobs.

Multiple loans: While some plan sponsors noted that their plans  limited the number of loans participants can take from their retirement  plan, others do not. Some plan sponsors limited participants to  between one and three simultaneous loans, and one plan  administrator indicated that 92 percent of their plan-sponsor clients  allowed no more than two simultaneous loans. Other plan sponsors  placed no limit on the number of participant loans or limited loans to  one or two per calendar year, in which case a participant could take  out a new loan at the start of a calendar year regardless of whether or  not outstanding loans had been repaid. Stakeholders described some  participants as “serial” borrowers, who take out multiple loans and  have less disposable income as a result of ongoing loan payments.  One plan administrator stated that repeat borrowing from 401(k) plans  was common, and some participants took out new loans to pay off old  loans.

Other loan restrictions: Allowing no loans or one total outstanding loan  can cause participants facing economic shocks to take a hardship  withdrawal, resulting in the permanent removal of their savings and  subjecting them to income tax liability and, possibly, an additional 10  percent tax for early distributions and a suspension on contributions.

Minimum loan amounts: Minimum loan amounts may result in  participants borrowing more than they need to cover planned  expenses. For example, a participant may have a $500 expense for  which they seek a loan, but may have to borrow $1,000 due to plan  loan minimums.

Stakeholders Said Participants Take Early Withdrawals for Pressing Financial Needs

Stakeholders said that plan participants take plan loans and hardship  withdrawals for pressing financial needs. Many plan sponsors we  interviewed said they used the IRS safe harbor exclusively as criteria  when reviewing a participant’s application for a hardship withdrawal.  Stakeholders said the top two reasons participants took hardship  withdrawals were to prevent imminent eviction or foreclosure and to cover  out-of-pocket medical costs not covered by health insurance.  Participants generally took loans to reduce debt, for emergencies, or to  purchase a primary residence. Stakeholders also said that participants  who experienced economic shocks stemming from job loss made early  withdrawals. They said retirement plans often served as a form of  insurance for those between jobs or facing a sudden economic shock and  participants accessed their retirement accounts because, for many, they  were the only source of savings. They cited personal debt, health care  costs, and education as significant factors that affected employees across  all income levels.

Stakeholders said some participants also used their retirement savings to  pay for anticipated expenses. Two plan administrators said education  expenses were one of the reasons participants took hardship  withdrawals. They said that participants accessed their retirement savings  to address the cost of higher education, including paying off their own  student loan debt or financing the college costs for family members. For  example, plan administrators told us that some participants saved with  the expectation of taking a hardship withdrawal to pay for college tuition.  Other participants utilized hardship withdrawals to purchase a primary  residence.

Reasons for IRA Withdrawals Are Not Reported to IRS

IRA owners generally may take withdrawals at any time and IRS does not  analyze the limited information it receives on the reasons for IRA  withdrawals. IRA owners can withdraw any amount up to their entire  account balance at any time. In addition, IRAs have certain exceptions  from the additional 10 percent tax for early distributions. For example, IRA  withdrawals taken for qualified higher education expenses, certain health  insurance premiums, and qualified “first-time” home purchases (up to  $10,000) are excepted from the additional 10 percent tax. IRA owners  who make an IRA distribution receive a Form1099-R or similar statement  from their provider. On the Form 1099-R, IRA providers generally identify  whether the withdrawal, among other things, can be categorized as a  normal distribution, an early distribution, or a direct distribution to a  qualified plan or IRA. For an early distribution, the IRA provider may  identify whether a known exception to the additional 10 percent tax  applies. For their part, IRA owners are required to report early  withdrawals on their income tax returns, as well as the reason for any  exception from the additional 10 percent tax for a limited number of  items. In written responses to questions, an IRS official indicated that  IRS collected data on the exemption reason codes, but did not use  them.

Stakeholders Suggested Strategies to Balance Access to Early Withdrawals with the Need to Build Long-term Retirement Savings

Some Plan Sponsors Have Implemented Policies to Preserve the Benefits of Early Withdrawals While Reducing Their Long-term Effects

Preserving 401(k) Account Balances at Job Separation

Some plan sponsors we interviewed had policies in place that may  reduce the long-term impact of early withdrawals of retirement savings  taken at job separation. Policies suggested by plan sponsors included:

Providing a periodic installment distribution option: Although some  plan sponsors may require participants wanting a distribution to take  their full account balance at job separation, other plan sponsors  provided participants with an option of receiving their account balance  in periodic installments. For example, one plan sponsor gives  separating participants an option to receive periodic installment  distributions at intervals determined by the participants. This plan  sponsor said separating participants could select distributions on a  monthly, quarterly, semi-annual or annual basis. These participants  could also elect to stop distributions at any time, preserving the  remaining balance in the employer’s plan. The plan sponsor said the  plan adopted this option to help separating participants address any  current financial needs, while preserving some of the account balance  for retirement. Another plan sponsor adopted a similar policy to  address the cyclical nature of the employer’s business, which can  result in participants being terminated and rehired within one year.

Offering partial distributions: One plan sponsor provided separated  participants with the option of receiving a one-time, partial  distribution. If a participant opted for partial distribution, the plan  sponsor issued the distribution for the requested sum and preserved  the remainder of the account balance in the plan. The plan sponsor  adopted the partial distribution policy to provide separating  participants with choices for preserving account balances, while  simultaneously providing access to address any immediate financial  needs.

Providing plan loan repayment options for separated participants:  Some plan sponsors allowed former participants to continue making  loan repayments after job separation. Loan repayments after job  separation reduce the loan default risk and associated tax implications  for participants. Some plan sponsors said that separating  participants who have the option to continue repaying an outstanding  loan balance generally have three options: (1) to continue repaying  the outstanding loan, (2) to repay the entire balance of the loan at  separation within a set repayment period, or (3) not to repay the loan.  Those participants who continue repaying their loans after separation  generally have the option to set up automatic debit payments to  facilitate the repayment. Those separated participants who do not set  up loan repayment terms within established timeframes, or do not  make a payment after the loan repayment plan has been established,  default on their loan and face the associated tax consequences,  including, possibly, an additional 10 percent tax for early distributions.

Some plan sponsors we spoke with placed certain limits on participant  loan activity, which may reduce the incidence of loan defaults (see fig. 2).

Limiting loan amounts to participant contributions: Some plan  sponsors said they limited plan loans to participant contributions and  any investment earnings from those contributions to reduce early  withdrawals of retirement savings. For example, one plan sponsor’s  policy limited the amount a participant could borrow from their plan to  50 percent of participant contributions and earnings, compared to 50  percent of the total account balance.

Implementing a waiting period after loan repayment before a  participant can access a new loan: Some plan sponsors said they had  implemented a waiting period between plan loans, in which a  participant, having fully paid off the previous loan, was temporarily  ineligible to apply for another. Among plan sponsors who  implemented a waiting period, the length varied from 21 days to 30  days.

Reducing the number of outstanding loans: Some plan sponsors we  spoke with limited the number of outstanding plan loans to either one  or two loans. One plan sponsor had previously allowed one new  loan each calendar year, but subsequently revised plan policy to allow  participants to have a total of two outstanding loans. The plan sponsor  said the rationale was to balance limiting participant loan behavior  with the ability of participants to access their account balance.

Some plan sponsors said they had expanded the definition of immediate  and heavy financial need beyond the IRS safe harbor to better align with  the economic needs of their participants. For example, one plan  sponsor approved a hardship withdrawal to help a participant pay  expenses related to a divorce settlement. Another plan sponsor  developed an expanded list of qualifying hardships, including past-due  car, mortgage, or rent payments; and payday loan obligations.

Some plan sponsors implemented loan programs outside their plan,  contracting with third-party vendors to provide short-term loans to  employees. For example, one plan sponsor instituted a loan program that  allowed employees to borrow up to $5,000 from a third-party vendor that  would be repaid through payroll deduction. This plan sponsor said the  loan program featured an 8 to 12 percent interest rate, and approval was  not based on a participant’s credit history. The plan sponsor also  observed that they had fewer 401(k) loan applications since the third- party loan program was implemented. A second plan sponsor instituted a  similar loan program that allowed employees to borrow up to $500  interest free from a third-party vendor. According to this sponsor, to  qualify for a loan, an employee must demonstrate financial hardship and  have no outstanding plan loans, and is required to attend a financial  counseling course if their loans are approved.

Improving Participants’ Financial Wellness

Some plan sponsors said they have provided workplace-based financial  wellness resources for their participants to improve their financial literacy.  Some implemented optional financial wellness programs that covered  topics such as investment education, how plan loans work, and the  importance of saving for emergencies. These plan sponsors told us they  offered on-site financial counseling with representatives of the plan  administrator to help provide guidance on financial decision-making;  however, other plan sponsors said that—despite their investment in  participant-specific financial education—participation in these programs  was low.

Stakeholders Suggested Strategies That Could Preserve the Benefits of Early Withdrawals While Reducing Their Long-term Effects

Stakeholders suggested strategies that they believed could help mitigate  the long-term effects of early withdrawals of retirement savings on IRA  owners and plan participants. They noted that any of these proposed  strategies, if implemented, could (1) increase the costs of administering  IRAs and plans, (2) require changes to federal law or regulations, and (3)  involve tradeoffs between providing access to retirement savings and  preserving savings for retirement.

Stakeholders suggested several strategies that, if implemented, could  help reduce early withdrawals from IRAs. These strategies centered on  modifying existing rules to reduce early withdrawals from IRAs (and  subsequently the amount paid as a result of the additional 10 percent tax  for early distributions). Specifically, stakeholders suggested:

Raising the age at which the additional 10 percent tax applies: Some  stakeholders noted that raising the age at which the additional 10  percent tax for early distributions applies from 59½ to 62 would align it  with the earliest age of eligibility to claim Social Security and may  encourage individuals to consider a more comprehensive retirement  distribution strategy. However, other stakeholders cautioned that it  could have drawbacks for employees in certain situations. For  example, individuals who lose a job late in their careers could face  additional tax consequences for accessing an IRA before reaching the  age 62. In addition, one stakeholder said some individuals may shift  to a part-time work schedule later in their careers as they transition to  retirement and plan on taking IRA withdrawals to compensate for their  lower wages.

Allowing individuals to roll existing plan loans into an IRA: Some  stakeholders said that allowing individuals to include an existing plan  loan as part of a rollover into an IRA, although currently not allowed,  would likely reduce plan loan defaults by giving individuals a way to  continue repaying the loan balance. One stakeholder suggested that  rolling an existing plan loan into an IRA could be administratively  challenging for IRA providers, but doing so to repay the loan may  ultimately preserve retirement savings.

Allowing IRA loans: While currently a prohibited transaction that could  lead to the cessation of an IRA, some stakeholders suggested that  IRA loans could theoretically reduce the amounts being permanently  removed from the retirement system through early IRA withdrawals.  One stakeholder said an IRA loan would present a good alternative to  an early withdrawal from an IRA account because it would give the  account holder access to the balance, defer any tax implications, and  improve the likelihood the loaned amount would ultimately be repaid.  However, another stakeholder said that allowing IRA loans could  increase early withdrawals, given the limited oversight of IRAs, as well  as additional administrative costs and challenges for IRA providers.

Stakeholders suggested several strategies that, if implemented, could  reduce the effect of cashouts at job separation from 401(k) plans.

Simplifying the rollover process: Stakeholders proposed two  modifications to the current rollover process that they believe could  make the process more seamless and reduce the incidence of  cashouts. First, stakeholders suggested that a third-party entity tasked  with facilitating rollovers between employer plans for a separating  participant would likely reduce the incidence of cashouts at job  separation. Such an entity could automatically route a participant’s  account balance from the former plan to a new one. One  stakeholder said having a third-party entity facilitate the rollover would  eliminate the need for a plan participant to negotiate the process.  Such a service, however, would likely come at cost that may likely be  passed onto participants. Stakeholders also suggested direct  rollovers of account balances between plans could further reduce the  incidence of cashouts. One stakeholder, however, cautioned that  direct rollovers could have downsides for some participants. For  example, participants who prefer to keep their balance in their former  employer’s plan but provide no direction to the plan sponsor may  inadvertently find their account balance rolled into a new employer’s  plan.

Restricting cashouts to participant contributions only: Some  stakeholders suggested limiting the assets a participant may access  at job separation. For example, some stakeholders said that  participants should not be allowed to cash out vested plan sponsor  contributions, thus preserving those contributions and their earnings  for retirement. However, this strategy could result in participants  overseeing and monitoring several retirement accounts.

Stakeholders suggested several strategies that, if implemented, could  limit the adverse effect of hardship withdrawals on retirement savings.

Narrowing the IRS safe harbor: Although some plan sponsors are  expanding the reasons for a hardship to align with perceived  employee needs, some stakeholders said narrowing the IRS safe  harbor would likely reduce the incidence of early withdrawals. For  example, some stakeholders suggested narrowing the definition of a  hardship to exclude the purchase of a primary residence or for  postsecondary education costs. In addition, one stakeholder said  alternatives exist to finance home purchases (mortgages) and  postsecondary education (student loans). Stakeholders noted that  eliminating the purchase of a primary residence and postsecondary  education costs from the IRS safe harbor would make hardship  withdrawals a tool more strictly used to avoid sudden and unforeseen  economic shocks. In combination with the two exclusions, one  stakeholder suggested consideration be given to either reducing or  eliminating the additional 10 percent tax for early distributions that  may apply to hardship withdrawals.

Replacing hardship withdrawals with hardship loans: Stakeholders  said replacing a hardship withdrawal, which permanently removes  money from the retirement system, with a no-interest hardship loan,  which would be repaid to the account, would reduce early  withdrawals. Under this suggestion, if the loan were not repaid within  this predetermined time frame, the remaining loan balance could be  considered a deemed distribution and treated as income (similar to  the way a hardship withdrawal is treated now).

Incorporating emergency savings features into 401(k) plans:  Stakeholders said incorporating an emergency savings account into  the 401(k) plan structure may help participants absorb economic  shocks and better prepare for both short-term financial needs and  long-term retirement planning. (See fig. 3.)

In addition, stakeholders said participants with emergency savings  accounts could be better prepared to avoid high interest rate credit  options, such as credit cards or payday loans, in the event of an  economic shock. Stakeholders had several ideas for implementing  emergency savings accounts. For example, one stakeholder  suggested that, were it allowed, plan sponsors could revise automatic  account features to include automatic contributions to an emergency  savings account. Some stakeholders also said emergency savings  accounts could be funded with after-tax participant contributions to  eliminate the tax implications when withdrawing money from the  account. However, another stakeholder said emergency savings  contributions could reduce contributions to a 401(k) plan.

In the United States, the amount of aggregate savings in retirement  accounts continues to grow, with nearly $17 trillion invested in 401(k)  plans and IRAs. Early access to retirement savings in these plans may  incentivize plan participation, increase participant contributions, and  provide participants with a way to address their financial needs. However,  billions of dollars continue to leave the retirement system early. Although  these withdrawals represent a small percentage of overall assets in these  accounts, they can erode or even deplete an individual’s retirement  savings, especially if the retirement account represents their sole source  of savings.

Employers have implemented plan policies that seek to balance the short- term benefits of providing participants early access to their accounts with  the long-term need to build retirement savings. However, the way plan  sponsors treat outstanding loans after a participant separates from  employment has the potential to adversely affect retirement savings. In  the event of unexpected job loss or separation, plan loans can leave  participants liable for additional taxes. Currently, the incidence and  amount of loan offsets in 401(k) plans cannot be determined due to the  way DOL collects data from plan sponsors. Additional information on loan  offsets would provide insight into how plan loan features might affect  long-term retirement savings. Without clear data on the incidence of these  loan offsets, which plan sponsors are generally required to include, (but  not itemize) on the Form 5500, the overall extent of unrepaid plan loans in  401(k) plans cannot be known.

To better identify the incidence and amount of loan offsets in 401(k) plans  nationwide, we recommend that the Secretary of Labor direct the  Assistant Secretary for EBSA, in coordination with IRS, to revise the Form  5500 to require plan sponsors to report qualified plan loan offsets as a  separate line item distinct from other types of distributions.  (Recommendation 1)

We provided a draft of this product to the Department of Labor, the  Department of the Treasury, and the Internal Revenue Service for review  and comment. In its written comments, reproduced in appendixes IV and  V, respectively, DOL and IRS generally agreed with our findings, but  neither agreed nor disagreed with our recommendation.  DOL said it  would consider our recommendation as part of its overall evaluation of the  Form 5500, and IRS said it would work with DOL as it responds to our  recommendation. The Department of Treasury provided no formal written  comments. In addition, DOL, IRS, Treasury and two third-party subject  matter experts provided technical comments, which we incorporated in  the report, as appropriate  As agreed with your staff, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Labor,  Secretary of the Treasury, Commissioner of Internal Revenue, and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff making key contributions to this  report are listed in appendix VI.

Appendix I: Objectives, Scope, and Methodology

The objectives of this study were to determine: (1) what are the incidence  and amount of retirement savings being withdrawn early; (2) what is  known about the factors that might lead individuals to access their  retirement savings early; and (3) what strategies or policies, if any, might  reduce the incidence and amount of early withdrawals of retirement  savings.

To examine the incidence and amount of early withdrawals from  individual retirement accounts (IRA) and 401(k) plans, we analyzed the  most recent nationally representative data available in three relevant  federal data sources, focusing our analysis on individuals in their prime  working years (ages 25 to 55), when possible. For consistency, we  analyzed data from 2013 from each data source because it was the most  recent year that data were available for all types of early withdrawals we  examined. We adjusted all dollar-value estimates derived from each data  source for inflation and reported them in constant 2017 dollars. We  determined that the data from these sources were sufficiently reliable for  the purposes of our report.

First, to examine recent incidence and amount of early withdrawals  from IRAs and the associated tax consequences for individuals ages  25 to 55, we analyzed IRS estimates based on tax returns as filed by  taxpayers before enforcement activity published by the Internal  Revenue Service’s (IRS) Statistics of Income Division for tax year  2013. Specifically, we analyzed the number of taxpayers reporting  early withdrawals from their IRAs in 2013 and the aggregate amount  of these withdrawals. To provide additional context on the scope of  these early withdrawals, we analyzed the age cohort’s total IRA  contributions and the end-of-year fair market value of the IRAs, and  compared these amounts to the aggregate amount withdrawn. To  examine the incidence and amount of taxes paid as a result of the  additional 10 percent tax for early distributions, we analyzed estimates  on the additional 10 percent tax paid on qualified retirement plans in  2013. Although IRS did not delineate these data by age, we used  these data as proxy because IRS assesses the additional 10 percent  tax on distributions to taxpayers who have not reached age 59½.  Given the delay between a withdrawal date and the date of the tax  filing, it is possible that some of the taxes were paid in the year  following the withdrawal. We reviewed technical documentation and  developed the 95 percent confidence intervals that correspond to  these estimates.

Second, to examine the incidence and amount of early withdrawals  from 401(k) plans, we analyzed data included in the 2014 panel of the  U.S. Census Bureau’s Survey of Income and Program Participation  (SIPP)—a nationally representative survey of household income,  finances, and use of federal social safety net programs—along with  retirement account contribution and withdrawal data included in the  SIPP’s Social Security Administration (SSA) Supplement on  Retirement, Pensions, and Related Content. Specifically, we  developed percentage and dollar-value estimates of the incidence and  amount of lump sum payments received and hardship withdrawals  taken by participants in 401(k) plans in 2013. Because the SIPP is  based upon a complex probability sample, we used Balanced  Repeated Replication methods with a Fay adjustment to derive all  percentage, dollar-total, and dollar-ratio estimates and their 95  percent confidence intervals. To better understand the characteristics  of individuals who received a lump sum and/or took a hardship  withdrawal in 2013, we analyzed a range of selected individual and  household demographic variables and identified characteristics  associated with a higher incidence of withdrawals. We applied domain  estimation methods to make estimates for these subpopulations. (For  a list of variables used and the results of our analysis, please see  appendix III.) We attempted to develop a multiple regression model to  estimate the unique association between each characteristic and  withdrawals, but determined that the SIPP did not measure key  variables in enough detail to develop persuasive causal explanations.  The sample size of respondents receiving lump sums was too small to  precisely estimate the partial correlations of many demographic  variables at once. Even with adequate sample sizes, associations  between broad demographic variables, such as age and income,  likely reflected underlying causes, such as retirement and financial  planning strategies, which SIPP did not measure in detail.

Third, to examine the incidence and amount of unrepaid plan loans  from 401(k) plans, we analyzed the latest filing of annual plan data  that plan sponsors reported on the Form 5500 to the Department of  Labor (DOL) for the 2013 plan year. We looked at unrepaid plan  loans reported by sponsors of large plans (Schedule H) and small  plans (Schedule I). For each schedule, we analyzed two variables  related to unrepaid plan loans: (1) deemed distributions of participant  loans (which captures the amount of loan defaults by active  participants) and (2) benefits distributed directly to participants (which  includes plan loan offsets for a variety of reasons, including plan loans  that remain unpaid after a participant separates from a plan). Because  plan sponsors report data in aggregate and do not differentiate by  participant age, we calculated and reported the aggregate of loan  defaults identified as deemed distributions in both schedules. We  could not determine the amount of plan loan offsets based on the way  that plan sponsors are required to report them. Specifically, plan  sponsors are required to treat unrepaid loans occurring after a  participant separates from a plan as reductions or offsets in plan  assets, and are required to report them as part of a larger commingled  category of offsets that also includes large-dollar items like rollovers of  account balances to another qualified plan or IRA. As a result, we  were unable to isolate and report the amount of this category of  unrepaid plan loans.

To identify what is known about the factors that might lead individuals to  access their 401(k) plans and IRAs and what strategies or policies might  reduce the early withdrawal of retirement savings, we performed a  literature search using multiple databases to locate documents regarding  early withdrawals of retirement savings published since 2008 and to  identify experts for interviews. The search yielded a wide variety of  scholarly articles, published articles from various think tank organizations,  congressional testimonies, and news reports. We reviewed these studies  and identified factors that lead individuals to withdraw retirement savings  early, as well as potential strategies or policies that might reduce this  behavior. The search also helped us identify additional potential  interviewees.

To answer our second and third objectives, we visited four metropolitan  areas and conducted 51 interviews with a wide range of stakeholders that  we identified in the literature. In some cases, to accommodate  stakeholder schedules, we conducted phone interviews or accepted  written responses. Specifically, we interviewed human resource  professionals from 22 private-sector companies (including 4 written  responses), representatives from 8 plan administrators, 13 retirement  research experts (including 1 written response), representatives from 4  industry associations, representatives from 2 participant advocacy  organizations, and representatives from 2 financial technology  companies.

We conducted in-person interviews at four sites to collect information  from three different groups: (1) human resource officials in private-sector  companies, (2) top 20 plan administrators or recordkeepers, and (3)  retirement research experts. We selected site visit locations in four  metropolitan locations that were home to representatives of each group.  To select companies for potential interviews, we reached out to a broad  sample of Fortune 500 companies that offered a 401(k) plan to  employees and varied by geographic location, industry, and number of  employees. We selected plan administrators based on Pensions and  Investments rankings for assets under management and number of  individual accounts. We selected retirement research experts who had  published research on early withdrawals from retirement savings, as well  as experts that we had interviewed in our prior work. Based on these  criteria, we conducted site visits in Boston, Massachusetts; Chicago,  Illinois; the San Francisco Bay Area, California; and Seattle, Washington.  We held interviews with parties in each category who responded  affirmatively to our request. In each interview, we solicited names of  additional stakeholders to interview. We also interviewed representatives  of organizations, such as financial technology companies, participant  advocacy organizations, industry associations, and plan administrators  focused on small businesses, whose work we deemed relevant to our  study.

We developed a common question set for each stakeholder category that  we interviewed. We based our interview questions on our literature  review, research objectives, and the kind of information we were soliciting  from each stakeholder category. In each interview, we asked follow-up  questions based on the specific responses provided by interviewees.

In our company interviews, we asked how companies administered  retirement benefits for employees; company policies and procedures  regarding separating employees and the disposition of their retirement  accounts; company policies regarding plan loans, hardship  withdrawals, and rollovers from other 401(k) plans; and company  strategies to reduce early withdrawals from retirement savings.

In our interviews with plan administrators, we asked about factors that  led individuals to access their retirement savings early, how plan  providers interacted with companies and separating employees,  available data on loans and hardship withdrawals from client  retirement plans, and potential strategies to reduce the incidence and  amount of early withdrawals.

In our interviews with retirement research experts, financial  technology companies, participant advocacy organizations, and  industry associations we asked about factors that led individuals to  make early withdrawals from their retirement savings and any  potential strategies that may reduce the incidence and amount of  early withdrawals.

In our interviews with plan administrators and retirement research  experts, we also provided a supplementary table outlining 37 potential  strategies to reduce early withdrawals from retirement savings. We asked  interviewees to comment on the strengths and weaknesses of each  strategy in terms of its potential to reduce early withdrawals, and gave  them opportunity to provide other potential strategies not listed in the  tables. We developed the list of strategies based on the results of our  literature review.

Some interviewees also provided us with additional data and documents  to assist our research. For example, some companies and plan  administrators we interviewed provided quantitative data on the number  of plan participants, the average cashout or rollover amounts, the  percentage of participants who took loans or hardship withdrawals from  their retirement accounts, and known reasons for these withdrawals.  Some research experts also provided us with documentation, including  published articles and white papers that supplemented our interviews and  literature review. All data collected through these methods are  nongeneralizable and reflect the views and experiences of the  respondents and not the entire population of their respective constituent  groups.

To answer our second and third objectives, we analyzed the content of  our stakeholder interview responses and corroborated our analysis with  information obtained from our literature review and quantitative  information provided by our interviewees. To examine what is known  about the factors leading individuals to access retirement savings early,  we catalogued common factors that stakeholders identified as  contributing to early withdrawals from retirement savings. We also  collected information on plan rules governing early participant withdrawals  of retirement savings.

To identify potential strategies or policies that might reduce the incidence  and amount of early withdrawals, we analyzed interview responses and  catalogued (1) company practices that employers identified as having an  effect in reducing early withdrawals and (2) strategies that stakeholders  suggested that could achieve a similar outcome. GAO is not endorsing or  recommending any strategy in this report, and has not evaluated these  strategies for their behavioral or other effects on retirement savings or on  tax revenues.

Appendix II: Selected Provisions Related to Early Withdrawals from 401(k) Plans and Individual Retirement Accounts (IRAs)

Appendix II: Selected Provisions Related to  Early Withdrawals from 401(k) Plans and  Individual Retirement Accounts (IRAs)

Requirements  Provides an exception for distributions for qualified higher education expenses and for  qualified “first-time” home purchases made before age 59½ from the additional 10  percent tax for early distributions  Defines “qualified first-time homebuyer distribution” and “first-time homebuyer,” and  prescribes the lifetime dollar limit on such distributions, among other things.

Allows eligible individuals to make tax-deductible contributions to individual retirement  accounts, subject to limits based, for example, on income and pension coverage.

Provides for the loss of exemption for an IRA if the IRA owner engages in a prohibited  transaction, which results in the IRA being treated as distributing all of its assets to the  IRA owner at the fair market value on the first day of the year in which the transaction  occurred.

Defines a prohibited transaction to include the lending of money or other extension of  credit between a plan and a disqualified person.

Requirements   Allows eligible individuals to make contributions to a Roth IRA that are not tax- deductible. Distributions from the account can generally be treated as a qualified  distribution if a distribution is made on or after the Roth IRA owner reaches age 59½  and the distributions is made after the 5-taxable year period beginning when the  account was initially opened.

Appendix III: Estimated Incidence of Certain Early Withdrawals of Retirement Savings

Appendix III: Estimated Incidence of Certain  Early Withdrawals of Retirement Savings 401(k) plans  401(k) plans  ($1000 or more)

401(k) plans  401(k) plans  ($1000 or more)

Legend: * Sampling error was too large to report an estimate.

Appendix V: Comments from the Internal Revenue Service

Appendix VI: GAO Contact and Staff Acknowledgment

In addition to the contact named above, Dave Lehrer (Assistant Director);  Jonathan S. McMurray (Analyst-in-Charge); Gustavo O. Fernandez; Sean  Miskell; Jeff Tessin; and Adam Wendel made key contributions to this  report. James Bennett, Holly Dye, Sara Edmondson, Sarah Gilliland,  Sheila R. McCoy, Ed Nannenhorn, Katya Rodriguez, MaryLynn Sergent,  Linda Siegel, Rachel Stoiko, Frank Todisco, and Sonya Vartivarian also  provided support.

The Nation’s Fiscal Health: Action Is Needed to Address the Federal  Government’s Future. GAO-18-299SP. Washington, D.C.: June 21, 2018.

The Nation’s Retirement System: A Comprehensive Re-evaluation is  Needed to Better Promote Future Retirement Security. GAO-18-111SP.  Washington, D.C.: October 18, 2017.

Retirement Security: Improved Guidance Could Help Account Owners  Understand the Risks of Investing in Unconventional Assets.  GAO-17-102. Washington, D.C.: December 8, 2016.  401K Plans: Effects of Eligibility and Vesting Policies on Workers’  Retirement Savings. GAO-17-69. Washington, D.C.: October 21, 2016.

Retirement Security: Low Defined Contribution Savings May Pose  Challenges. GAO-16-408. Washington, D.C.: May 5, 2016.

Retirement Security: Shorter Life Expectancy Reduces Projected Lifetime  Benefits for Lower Earners. GAO-16-354. Washington, D.C.: March 25,  2016.

Social Security’s Future: Answers to Key Questions. GAO-16-75SP.  Washington, D.C.: October 27, 2015.

Retirement Security: Federal Action Could Help State Efforts to Expand  Private Sector Coverage. GAO-15-556. Washington, D.C.: September 10,  2015.

Highlights of a Forum: Financial Literacy: The Role of the Workplace.  GAO-15-639SP. Washington, D.C.: July 7, 2015.  401(K) Plans: Greater Protections Needed for Forced Transfers and  Inactive Accounts. GAO-15-73. Washington, D.C.: November 21, 2014.

Older Americans: Inability to Repay Student Loans May Affect Financial  Security of a Small Percentage of Retirees. GAO-14-866T. Washington,  D.C.: September 10, 2014.

Financial Literacy: Overview of Federal Activities, Programs, and  Challenges. GAO-14-556T. Washington, D.C.: April 30, 2014.

Retirement Security: Trends in Marriage and Work Patterns May Increase  Economic Vulnerability for Some Retirees. GAO-14-33. Washington,  D.C.: January 15, 2014.  401(K) Plans: Labor and IRS Could Improve the Rollover Process for  Participants. GAO-13-30. Washington, D.C.: March 7, 2013.

Retirement Security: Women Still Face Challenges. GAO-12-699.  Washington, D.C.: July 19, 2012.  401(K) Plans: Policy Changes Could Reduce the Long-term Effects of  Leakage on Workers’ Retirement Savings. GAO-09-715. Washington,  D.C: August 28, 2009.

Usually, the money in a tax-deferred retirement account, like a 401(k) plan, stays there until retirement. However, you may be able to borrow or withdraw money from such accounts to meet pressing needs, such as medical bills.

If you default on a loan from your retirement account, it counts as an early withdrawal, which may be subject to taxes and penalties. Early withdrawals can also erode your long-term savings.

We reported on policies and strategies that might reduce early withdrawals, such as building emergency savings features into retirement plans. We also recommended improving information about defaults on retirement account loans.