Protecting Workers 401(k) Funds

At least two members of Congress want to make it tougher for workers to tap their 401(k) retirement funds — and to make it easier for them to repay those loans when they do.

Sen. Kohl, (WI-D) and Sen. Enzi (WY-R), have sponsored a bill they claim will help protect 401(k)s. In 2010, nearly 28% of those with 401(k)s had loans outstanding on them, a record high, with the average loan $7,860.

Here are the basic provisions of what is being called the SEAL Act:

Extends Rollover Period For Plan Loan Amounts: When an employee with a 401(k) plan loses his or her job, he or she often faces the tough choice between defaulting on his or her outstanding loan and incurring tax penalties or immediately repaying the entire outstanding loan balance. The SEAL Act allows an employee to contribute the amount outstanding on their loan to an IRA by the time they file their taxes for that year.

“Paying back a loan after just losing your job can be difficult so our bill would give people more time to pay themselves back,” Kohl said.

Allows 401(k) participants to continue to make elective contributions during the six months following a hardship withdrawal: Currently, after an employee receives a hardship withdrawal from a 401(k) plan, she or he is prohibited from making elective contributions to their retirement account for at least six months. The loss of both employee contributions and company matching contributions during this period can exacerbate negative the long-term effects on retirement savings. The SEAL Act allows participants to continue to make contributions during the six months following a hardship withdrawal.

Reduces the overall number of loans that participants can take at one time: While it is important for participants to have access to their savings in times of need, the administrative burden of managing multiple loans for a few individuals can increase the costs for all workers in a plan. The SEAL Act reduces the overall number of loans that participants can take to three at one time. Currently employers determine the number of loans available, and many employers, like the Federal Thrift Savings Program, have chosen to limit the number of loans to reduce leakage and overall cost.

Bans products that promote leakage, such as the 401(k) debit card: Certain products actively encourage participants to tap into their savings before retirement, often accruing large fees in the process. One such product is a debit card linked directly to one’s 401(k) savings account. In 2008, Sens. Kohl and Charles Schumer (NY-D) introduced a bill barring companies from offering 401(k) debit cards. The legislation followed a hearing on the topic that Kohl held as Chairman of the Senate Special Committee on Aging.

Although 401(k) debit cards are not currently prevalent, a number of different companies have offered them in the past and some companies continue to market these cards online. The SEAL Act bans products like the 401(k) debit card. ◆