A bipartisan pair of lawmakers have introduced legislation that would make it easier for workers to repay loans or withdrawals they take from their employer-sponsored 401(k) plan, drawing praise from a leading trade group representing retirement-plan advisors.
The Shrinking Emergency Account Losses (SEAL) Act, authored by Sens. Bill Nelson (D-Fla.) and Mike Enzi (R-Wyo.), would extend the grace period to avoid penalties for repaying loans or withdrawals from a plan when a worker leaves a job. Under current law, former employees have up to 60 days to replenish their account before incurring a penalty. The SEAL Act would extend that to the next date the worker files federal income taxes.
"There are some problems when they're leaving a job -- they have to pay it back immediately or all the penalties are instituted against them, and so this extends the time so they have a little more time to put it back in because if they paid the penalties they're not going to put it back in. They've already paid for it once," Enzi said on Tuesday at a hearing of the Senate Committee on Health, Education, Labor and Pensions (HELP).
According to a 2011 study from human-resources services provider Aon Hewitt, some 70% of employees with loans from their retirement plans end up defaulting on their repayment obligations when they leave the job, while active employees only default on their loans 3% of the time.
The SEAL Act would also permit employees who take hardship withdrawals to continue to make contributions to their 401(k) plan to trigger the employer matching contributions, eliminating the six-month moratorium currently in place.
"Right now, if they take one of these hardship loans, they're not allowed to contribute for six months. They ought to be at least able to put in the amount that they can get their match from their employer," Enzi said.
Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries (ASPPA), touted the SEAL Act as an "important first step" in mitigating the penalties for workers who have to dip into their 401(k) plans as a result of a job loss or some other major event.
"More Americans save at work through an employer sponsored retirement plan than in any other way," Graff said in a statement. "We are mindful that some employees have serious immediate financial needs. Therefore, we believe it is important to minimize the harm that comes from accessing retirement funds for non-retirement purposes."
But the SEAL Act is only billed as a solution to one aspect of a much larger problem -- namely that Americans aren't saving enough for retirement.
Enzi and Nelson cited a study released in January by the advisory firm HelloWallet reporting that more than one in four Americans with 401(k) plans pull funds out of those accounts to cover expenses unrelated to retirement, with those withdrawals reaching $70 billion annually.
"It's an important issue because we're facing a retirement crisis in this country," HELP Committee Chairman Tom Harkin (D-Iowa) said at Tuesday's hearing. "Whether it's a young family struggling to pay off student loan debt, save for their children's education and put something aside for their own retirement, or someone who's body just can't handle the stress of work any longer, Americans are terrified that they will not have enough money to live on when t they stop working. And they're right to be scared."
Harkin said that he hopes to advance legislation through his committee this year that would establish universal access to a pension program where workers would earn "benefits they can't outlive." That broader overhaul of the retirement system would create what Harkin has dubbed USA Retirement Funds, pairing the defined-benefits of traditional pension plans with the portability of the 401k.
Harkin's committee last year released a report highlighting the inadequacy of the current retirement landscape, finding, among other things, that half of Americans have less than $10,000 in savings.
"I am extremely worried that 401(k)s are just becoming a savings account rather than a retirement plan," he said. "Most people simply are not saving enough for retirement and the dream of a secure retirement is growing more and more remote for middle-class families."