GAO 

United States Government Accountability Office

Report to the Chairman, Special 

Committee on Aging, U.S. Senate 

401(k) PLANS 

Policy Changes Could 

Reduce the Long-term 

Effects of Leakage on 

Workers’ Retirement 

Savings 

August 2009 

GAO-09-715 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

August 2009

401(k) PLANS

Policy Changes Could Reduce the Long-term Effects

of Leakage on Workers’ Retirement Savings

Highlights of GAO-09-715, a report to the 

Chairman, Special Committee on Aging, 

U.S. Senate 

Under federal regulations, 401(k) 

participants may tap into their 

accrued retirement savings before 

retirement under certain 

circumstances, including hardship. 

This “leakage” from 401(k) 

accounts can result in a permanent 

loss of retirement savings. GAO 

was asked to analyze (1) the 

incidence, amount, and relative 

significance of the different forms 

of 401(k) leakage; (2) how plans 

inform participants about hardship 

withdrawal provisions, loan 

provisions, and options at job 

separation, including the short- and 

long-term costs of each; and 

(3) how various policies may affect 

the incidence of leakage. To 

address these matters, GAO 

analyzed federal and 401(k) 

industry data and interviewed 

federal officials, pension experts, 

and plan administrators responsible for managing the majority of 

401(k) participants and assets. 

What GAO Recommends

GAO is suggesting that Congress 

consider changing the requirement 

for the 6-month contribution 

suspension following a hardship 

withdrawal. In addition, GAO 

recommends that the Secretary of 

Labor promote greater participant 

education on the importance of 

preserving retirement savings, and 

that the Secretary of the Treasury 

clarify and enhance loan 

exhaustion provisions to ensure 

that participants do not initiate 

unnecessary leakage through 

hardship withdrawals. Both 

agencies agreed to take actions 

consistent with GAO’s 

recommendations. 

The incidence and amount of the principal forms of leakage from 401(k) 

plans—that is, cashouts of account balances at job separation that are not 

rolled over into another retirement account, hardship withdrawals, and 

loans—have remained relatively steady, with cashouts having the greatest 

ultimate impact on participants’ retirement preparedness. Approximately 15 

percent of participants initiated some form of leakage from their retirement 

plans, according to an analysis of U.S. Census Bureau survey data collected in 

1998, 2003, and 2006. In addition, the incidence and amount of hardship 

withdrawals and loans changed little through 2008, according to data GAO 

received from selected major 401(k) plan administrators. Cashouts of 401(k) 

accounts at job separation can result in the largest amounts of leakage and the 

greatest proportional loss in retirement savings. 

Leakage as a Proportion of Overall 401(k) Plan Assets in 2006 

Employer matching 

contributions

Cashouts at job change Loan defaults ($561 million)

($74 b Hardship withdrawals ($9 billion) illion)

Sources: GAO analysis of Department of Labor and Census Bureau data; Art Explosion (images).

401(k) assets

$2.7 trillion

$

$

$ $ $ $

$

$

$

Participant contributions $ $

$ $

Most plans that GAO contacted used plan documents, call centers, and Web 

sites to inform participants of the short-term costs associated with the various 

forms of leakage, such as the tax and associated penalties. However, few 

plans provided them with information on the long-term negative implications 

that leakage can have on their retirement savings, such as the loss of 

compounded interest and earnings on the withdrawn amount over the course 

of a participant’s career. 

Experts that GAO contacted said that certain provisions had all likely reduced 

the overall incidence and amount of leakage, including those that imposed a 

10 percent tax penalty on most withdrawals taken before age 591⁄2, required 

participants to exhaust their plan’s loan provisions before taking a hardship 

withdrawal, and required plan sponsors to preserve the tax-deferred status of 

accounts with balances of more than $1,000 at job separation. However, 

experts noted that a provision requiring plans to suspend contributions to 

participant accounts for 6 months following a hardship withdrawal may exacerbate the long-term effect of leakage by barring otherwise able participants 

from contributing to their accounts. GAO also found that some plans are not 

following current hardship rules, which may result in unnecessary leakage. 

View GAO-09-715 or key components.

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 
Page i GAO-09-715 

Contents 

Letter 1

Background 4 

Leakage Has Remained Relatively Steady, with Cashouts Having 

the Greatest Impact on Retirement Savings 12 

Plans Used Various Means to Inform Participants about 

Withdrawal Provisions, but Few Alerted Them to the Negative 

Long-term Implications 23 

Experts Said That Some Statutory Provisions Have Helped Reduce 

Leakage 28 

Conclusions 35 

Matter for Congressional Consideration 36 

Recommendations for Executive Action 36 

Agency Comments 36 

Appendix I Scope and Methodology 38 

Appendix II 401(k) Administrators That GAO Contacted 43 

Appendix III Comments from the Department of Labor 44 

Appendix IV Comments from the Department of the Treasury 45 

Appendix V GAO Contact and Staff Acknowledgments 46 

Tables 

Table 1: Provisions Related to 401(k) Leakage 6 

Table 2: Comparison of the Rules Governing the Three Principal 

Forms of 401(k) Leakage 9 

Table 3: Recent Trends in 401(k) Leakage as Reported by Selected 

Major 401(k) Plan Administrators, 2005 through 2008 16 

Table 4: Illustration of the Effect of a $5,000 Loan, Hardship 

Withdrawal, or Cashout on a Participant’s 401(k) Account, 

by Age and Wage Level 18 

401(k) Plans
Table 5: Illustration of the Effect of Cashing Out the Entire 401(k) 

Account Balance at Job Separation, for Medium-Income 

Earners 19 

Table 6: Illustration of the Effect of Defaulting on a $5,000 Loan 

after 1 Year of Repayment, for a Medium-Income 401(k) 

Participant 22 

Table 7: Mandatory Disclosures Provided to 401(k) Plan 

Participants 23 

Table 8: Illustration of the Effect of the Reduction in the Cashout 

Amount on the Account Balance of a Medium-Income 

401(k) Participant at Age 65 30 

Table 9: Illustration of the Effect of Suspending Participant 

Contributions Following a $5,000 Hardship Withdrawal on 

a Medium-Income Participant’s Account Balance at Age 65 34 

Figures 

Figure 1: Options Available to Participants to Withdraw Money 

from a 401(k) Account before Retirement 11 

Figure 2: Estimated Percentage of 401(k) Participants Ages 15 to 60 

Reporting Leakage, by Leakage Type 13 

Figure 3: Estimated Total Amounts of Leakage Reported by 401(k) 

Participants, Ages 15 to 60, by Leakage Type 14 

Figure 4: Estimated Median Amounts of Leakage Reported by 

401(k) Participants, Ages 15 to 60, by Leakage Type 15 

Figure 5: Illustration of 401(k) Leakage as a Proportion of Overall 

401(k) Plan Assets in 2006 17 

Figure 6: Outstanding Participant Loan Balances and Number of 

Active 401(k) Participants, 1996 through 2006 20 

Figure 7: Loan Default Amounts Reported by 401(k) Plans, 1999 

through 2006 21 

Figure 8: Penalty Taxes Paid on Early Withdrawals from Qualified 

Retirement Plans and Average Penalty Paid, 1996 through 

2006 29 

Figure 9: Illustration of the Effect of Removing $5,000 from a 

401(k) Account by Taking a Loan before a Hardship 

Withdrawal, on the Account Balance of a Medium-Income 

Participant at Age 65 32 

Page ii GAO-09-715 401(k) Plans
Abbreviations 

DB defined benefit 

DC defined contribution 

ERISA Employee Retirement Income Security Act of 1974 

EBSA Employee Benefits Security Administration 

IRA individual retirement account 

IRS Internal Revenue Service 

OASDI Old-Age, Survivors, and Disability Insurance 

SIPP Survey of Income and Program Participation 

SMM summary of major modifications 

SPD summary plan description 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately. 

Page iii GAO-09-715 401(k) Plans
Page 1 GAO-09-715 

 

United States Government Accountability Office

Washington, DC 20548 

 

August 28, 2009 

The Honorable Herb Kohl 

Chairman 

Special Committee on Aging 

United States Senate 

Dear Mr. Chairman: 

The current economic recession has caused millions of U.S. workers to 

lose their homes, their jobs, and significant portions of their retirement 

savings. The sudden reduction in the value of retirement savings in 

response to stock market declines has reportedly led many 401(k) plan 

participants to feel less confident in reaching their retirement goals and to 

worry that they may never be able to retire. Moreover, the rise in 

unemployment has had a detrimental impact on retirement savings. For 

example, unemployed participants can no longer make tax-deferred 

contributions to employer-sponsored plans and will likely have more 

difficulty saving anything at all. In addition, unemployment may lead 

participants to tap into their accrued retirement savings to navigate 

difficult times. This “leakage,” which can result in the permanent loss of 

retirement savings, has raised concerns that plan participants may be 

jeopardizing their long-term retirement security through the short-term 

consumption of their retirement savings. Such reductions in retirement 

savings may be even more pronounced if the leakage occurs at a time 

when a participant’s account balance has already experienced market 

value losses. 

Since they were first introduced several decades ago, 401(k) plans have 

become the principal retirement savings vehicle for millions of U.S. 

workers. Unlike employees with more traditional defined benefit pensions, 

employees with defined contribution plans—such as 401(k) plans—choose 

to participate in their employers’ plans and generally decide the amount 

they want to contribute and how to invest it.1

 Thus, they bear the 

1

Employers may sponsor defined benefit (DB) or defined contribution (DC) plans for their 

employees. DB plans promise to provide a benefit that is generally based on an employee’s 

salary and years of service. See 29 U.S.C. § 1002(35). DB plans use a formula to determine 

the ultimate pension benefit participants are entitled to receive. Under a DC plan, such as a 

401(k) plan, employees have individual accounts to which the employee, employer, or both 

make contributions, and benefits are based on contributions, along with investment returns 

(gains and losses) on the accounts. See 29 U.S.C. § 1002(34). 

401(k) Plans
 

responsibility for funding and managing their investments in a way that 

seeks to achieve sufficient benefits in retirement. The removal of 

retirement savings prior to retirement can affect a participant’s ultimate 

preparedness for retirement, especially when the amounts removed are 

spent and not replaced. For example, 401(k) participants who choose to 

take a lump-sum distribution, or “cash out,” from their account balance 

when separating from their employer, rather than rolling the money over 

to another qualified plan, may find it difficult to accrue sufficient savings 

to provide adequate income in retirement. 

In this report, we use a standard definition of leakage—that is, participants 

tapping into their accrued retirement savings prior to retirement. We do 

not take into account other events that could adversely affect participant 

balances, such as participants not taking advantage of the full employer 

matching contribution, participants contributing less than the annual 

federal limit, or the costs associated with paying plan administrative fees.2

In addition, we use the term “cashout” to refer to a lump-sum distribution 

made to an employee at job separation that is not subsequently rolled over 

into a qualified retirement account or an individual retirement account 

(IRA).3

You asked us to examine several aspects of leakage from 401(k) plans. 

Specifically, we answer the following questions in this report: 

 

2

See GAO, Private Pensions: Changes Needed to Provide 401(k) Plan Participants and 

the Department of Labor Better Information on Fees, GAO-07-21 (Washington, D.C.: 

Nov. 16, 2006). In the 2006 report, we found that participants paid for the majority of 

investment fees and an increasing amount of plan recordkeeping fees, and that under the 

Employee Retirement Income Security Act of 1974, plans were not required to disclose 

information on 401(k) fees being borne by individual participants. While the current report 

focuses on participants’ elective removal of their accrued retirement savings, we recognize 

that 401(k) fees have a considerable long-term effect on the accumulation of retirement 

income. See GAO, Private Pensions: Participants Need Information on Risks They Face 

in Managing Pension Assets at and During Retirement, GAO-03-810 (Washington, D.C.: 

July 29, 2003). 

3

Both cashouts and hardship withdrawals result in the permanent removal of money from 

401(k) accounts. However, participant loans are borrowed from the plan and must be paid 

back to the plan. The borrowed amount does not leave the plan, unless the participant fails 

to repay according to the terms of the loan. A loan default would result in a distribution 

that would permanently reduce the account balance in a 401(k). In addition, a participant 

taking a loan may achieve slightly lower savings at retirement if the amount of loan interest 

paid back to the account during the loan repayment period is less than the market rate of 

return. Participants who have an outstanding loan balance at job separation generally must 

repay the loan balance in full or the loan will default, triggering an early distribution. 

Page 2 GAO-09-715 401(k) Plans
 

1. What are the incidence, amount, and relative significance of the 

different forms of 401(k) leakage? 

2. How do 401(k) plans inform participants about hardship withdrawal 

provisions, loan provisions, and options at job separation, including 

the short-term and long-term costs associated with each? 

3. What is known about how various policies may affect the incidence of 

401(k) leakage? 

To determine the principal forms of 401(k) leakage, we interviewed 

industry and academic experts, reviewed laws and regulations, and 

analyzed existing studies on leakage. We then identified cashouts, 

hardship withdrawals, and participant loans as the three principal forms of 

leakage for the purposes of this report. To determine the incidence and 

amount of leakage over time, we analyzed a cross-section of the 3 most 

recent years of nationally representative survey data collected in 1998, 

2003, and 2006 in the U.S. Census Bureau’s Survey of Income and Program 

Participation (SIPP). We also analyzed published annual statistics from the 

Department of Labor and the Internal Revenue Service (IRS), respectively, 

to obtain aggregate loan default amounts and early withdrawal penalties 

paid. To determine the recent prevalence of leakage, we analyzed 

summary data from 2005 through 2008 that we obtained from 401(k) plan 

administrators that represent about 22 million 401(k) participants and over 

$1 trillion in 401(k) plan assets. To illustrate the relative significance of 

leakage over time, we developed scenarios to simulate the effect that 

various forms and amounts of leakage may have on retirement savings. In 

developing these scenarios, we considered a range of factors, including 

historical and projected rates of return, earnings, wages, contribution 

rates, years until retirement, loan administration fees, and penalties 

associated with leakage. 

To determine how plans inform participants about leakage, we 

interviewed 26 plan administrators that represented an estimated 80 

percent of 401(k) participants and 65 percent of 401(k) plan assets. As part 

of these efforts, we analyzed documents related to leakage from 401(k) 

accounts and conducted 10 site visits during which we interviewed 

representatives, reviewed relevant documentation, and toured a 

participant call center. We also reviewed selected 401(k) plan sponsor and 

administrator Web sites, and current pension law and regulations. 

Appendix II provides a list of the 401(k) plan administrators that we 

contacted. 

Page 3 GAO-09-715 401(k) Plans
 

To identify what is known about how various policy options may affect the 

incidence of leakage, we identified provisions in current law, regulations, 

and legislative proposals to identify policy options that are likely to affect 

leakage. We then interviewed selected industry and academic experts to 

determine how these provisions may affect leakage. We analyzed their 

responses and identified the provisions that these experts said were likely 

to affect leakage. We then developed model scenarios based on the factors 

that experts identified, to illustrate the effect that certain provisions may 

have on the accumulation of a participant’s retirement savings. 

We conducted this performance audit from August 2008 to August 2009 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. We determined that the data that we 

analyzed were sufficiently reliable for the purposes of this report. 

Appendix I of this report contains a detailed description of the 

methodology used in this review and its limitations. 

Private-sector pension plans are classified either as defined benefit or as 

defined contribution plans. Defined benefit plans generally offer a fixed 

level of monthly retirement income based upon a participant’s salary, 

years of service, and age at retirement, regardless of how the plan’s 

investments perform. In contrast, defined contribution plans, such as 

401(k) plans, benefit levels depend on the contributions made to the plan 

and the performance of the investments in individual accounts, which may 

fluctuate in value. Named after section 401(k) of the Internal Revenue 

Code, traditional 401(k) plans allow workers to save for retirement by 

diverting a portion of their pretax income into an investment account that 

Background 

Page 4 GAO-09-715 401(k) Plans
 

can grow tax-free and be withdrawn without penalty after age 591⁄2.4

Employers and employees may make pretax contributions, up to certain 

limits, to individual participant accounts. In 2009, participants may 

contribute up to $16,500 per year. The 401(k) account balance is a function 

of both the contributions made to the accounts over a career as well as the 

investment performance of the account. As such, the declines in the 

markets can have a stark effect on retirement savings, as happened in 2007 

and 2008 when the financial markets declined. 

About one-half of all U.S. workers participate in some form of employersponsored retirement plan. Participation in 401(k) plans rose steadily from 

fewer than 8 million participants in the mid-1980s to over 70 million 

participants in 2006—the most recent year for which data were available. 

The assets in 401(k) plans also increased significantly over the same time 

period, from less than $100 billion to over $3 trillion.5

Current law limits participant access to their retirement savings in their 

employer-sponsored retirement plans so that the favorable tax treatment 

for retirement savings is limited to savings that are, in fact, used to provide 

retirement income. Only under certain circumstances do federal 

regulations allow 401(k) plan sponsors to provide participants with access 

to their tax-deferred retirement savings before retirement. IRS, within the 

Department of the Treasury, and Labor’s Employee Benefits Security 

Administration (EBSA) are primarily responsible for enforcing laws that 

govern defined contribution plans. IRS interprets and enforces provisions 

of the Internal Revenue Code that apply to tax-qualified pension plans. 

EBSA enforces the Employee Retirement Income Security Act (ERISA) 

reporting and disclosure provisions and fiduciary responsibility standards, 

 

4

The Internal Revenue Code, as amended, exempts certain early distributions from the 

penalty if the distributions are made to a beneficiary or estate on or after death; made on 

account of total and permanent disability; made as part of a series of substantially equal 

periodic payments over the life expectancy of the owner or life expectancies of the owner 

and the beneficiary; equal to or less than deductible medical expenses (7.5 percent of 

adjusted gross income); made due to an IRS levy of the plan; made to individuals called to 

active duty after September 11, 2001, and before December 31, 2007; made to a participant 

after separated from service with an employer in or after the year that he or she reaches 

age 55; made to an alternate payee under a qualified domestic relations order; dividends 

from employee stock ownership plans; or made to an individual whose main home was 

located in a designated hurricane disaster area and who sustained an economic loss by 

reason of the hurricane. Additionally, some plan sponsors offer Roth 401(k) plans that 

allow plan participants to make elective after-tax contributions through payroll deduction. 

5

For 2006 estimates, see Investment Company Institute, “The U.S. Retirement Market, 

2007,” Research Fundamentals, vol. 17, no. 3 (2008). 

Page 5 GAO-09-715 401(k) Plans
 

which, among other things, concern the type and extent of information 

provided to plan participants. 

Plan sponsors have considerable latitude within the regulatory guidelines 

to choose whether to provide this access in the form of a participant loan, 

a hardship withdrawal, or a lump-sum distribution when the participant 

separates from an employer. Plans may allow participants to take loans, 

but may place limitations on the amounts, purpose, or number of loans 

available. Plans may also allow participants who can demonstrate that 

they are facing a hardship to take hardship withdrawals. In addition, when 

separating from their employer, participants may elect to receive a lumpsum distribution of their account balance, or “cash out,” rather than to 

preserve the tax-deferred status of their accounts by rolling over their 

account into another qualified plan or IRA. Table 1 provides a summary of 

the provisions related to leakage from 401(k) plans. 

Table 1: Provisions Related to 401(k) Leakage 

Provision Requirements Cashouts 

Hardship 

withdrawals Loans 

Employee Retirement 

Income Security Act of 

1974 

Requires plan administrators to furnish participants with a 

summary plan description to ensure that all participants and 

beneficiaries in participant-directed individual account plans 

have the information relating to their benefits and rights under 

their plans. 

X X X 

Revenue Act of 1978 Provides for a cash or deferred arrangement under section 

401(k) of the Internal Revenue Code. 

X X X 

Internal Revenue Code of 

1986 

Levies a 10 percent penalty for early withdrawals from 

qualified retirement accounts except for instances involving 

death, disability, severance from service, plan termination, or 

the attainment of age 591⁄2. 

X X X 

Sets the maximum amount that the plan can permit as a loan 

as (1) the greater of $10,000 or 50 percent of a participant’s 

vested account balance or (2) $50,000, whichever is less. 

X 

Provides that a participant’s elective contributions to a 401(k) 

plan may not be distributed prior to the occurrence of certain 

events, such as the employee’s separation from service or a 

hardship. 

X X 

Provides that plan administrators may not cash out an account 

balance that exceeds $5,000 without the consent of the 

participant. 

X 

Prohibits a hardship withdrawal from being rolled over into an 

IRA or other qualified plan. 

X 

Provides exceptions for paying the 10 percent penalty on early 

withdrawals from qualified retirement plans. 

X 

Page 6 GAO-09-715 401(k) Plans
 

Provision Requirements Cashouts 

Hardship 

withdrawals Loans 

Requires plan administrators to provide a notice to a 

participant of his or her right, if any, to defer receipt of an 

immediately distributable benefit. 

X 

Taxpayer Relief Act of 

1997 

Allows for distributions from certain plans to be used without 

penalty to purchase first homes. 

X 

Economic Growth and 

Tax Relief Reconciliation 

Act of 2001 

Reduces elective contribution prohibition period following a 

hardship withdrawal, from 12 months to 6 months. 

X 

Requires automatic rollover of certain mandatory distributions 

unless a participant opts out and reduces the cap to $1,000 for 

involuntary cashouts at job separation. 

X 

Pension Protection Act of 

2006 

Permits hardship withdrawal distributions for expenses relating 

to medical, tuition, and funeral expenses for a “primary 

beneficiary.” 

X 

Requires plan sponsors to provide a notice to participants of 

the consequences of the failure to defer their account balance 

at job separation. 

X 

Source: GAO analysis of relevant laws. 

Plan sponsors may, but are not required to, offer loan and hardship 

withdrawal provisions to participants. In providing these options, plans 

offer participants a certain flexibility and short-term financial relief that 

may improve a participant’s overall long-term financial standing if the 

distributions are used, for example, to pay off high-interest credit card 

debt, purchase a primary residence, or support a college education. 

Furthermore, as we reported in October 1997, the availability of loan 

provisions is associated with encouraging workers to join their employersponsored 401(k) plans when they otherwise might not, resulting in higher 

overall participation and contribution rates.6

 Unlike other forms of 

leakage, participant loans, which are paid back to the plan with interest, 

become leakage only if they are not repaid. 

Early access to retirement savings may also burden participants with 

short-term costs and long-term consequences. In the short term, 

participants who take a distribution before reaching age 591⁄2 generally pay 

a 10 percent early withdrawal penalty and income taxes on the distribution 

amount, and may face other restrictions and fees, such as loan origination 

fees. In the longer term, this leakage may reduce the amounts that 

 

6

GAO, 401(k) Pension Plans: Loan Provisions Enhance Participation But May Affect 

Income Security for Some, GAO/HEHS-98-5 (Washington, D.C.: Oct. 1, 1997). 

Page 7 GAO-09-715 401(k) Plans
 

participants can save prior to retirement by permanently removing assets 

from their accounts and forgoing the accumulation of savings realized 

through compounding. 

Rules Affecting Early 

Distributions from 

Retirement Plans 

The tax-deferred contributions in participants’ 401(k) plans can only be 

distributed upon the occurrence of certain events. As shown in table 2, 

each of the principal forms of 401(k) leakage that we identified is subject 

to a number of specific rules. For example, to discourage the use of 

pension funds for purposes other than retirement, the law imposes an 

additional 10 percent tax on certain early distributions made from 

qualified retirement plans, such as a 401(k) plan, before a participant 

reaches age 591⁄2. As regular income distributions, these early distributions 

are subject to federal and state income tax withholding and taxed at the 

marginal income tax rate.7

 Some early distributions may not be taxable if 

they are rolled over into an IRA or another qualified retirement account. 

Certain other distributions have been exempted from the additional tax.8

 

7

Different portions of taxable income are taxed at different rates. IRS refers to the tax rate 

applied to the last dollar of income as the “marginal tax rate” for that return. 

8

IRS makes guidance available to participants on the rules governing distributions from 

qualified retirement accounts, including allowable exceptions, on its Web site: 

http://www.irs.gov. 

Page 8 GAO-09-715 401(k) Plans
 

Table 2: Comparison of the Rules Governing the Three Principal Forms of 401(k) Leakage 

Leakage type 

Amount 

restrictions Allowable purpose 

Documentation 

requirements Associated costs Other restrictions 

Cashouts Up to 100 

percent of 

account 

balance. 

Participants may use the 

distribution for any 

purpose. 

Participant with 

account balances 

over $5,000 must 

affirm their 

decision to take a 

lump-sum 

distribution at job 

separation. 

Participants are 

required to pay federal 

and state income taxes 

on the distribution 

amount. 

Participants under age 

591⁄2 may be subject to 

10 percent early 

withdrawal penalty. 

Participants are subject 

to 20 percent employer 

withholding. 

Available to participants 

only when separating 

from their employer. 

Generally, a plan 

administrator must obtain 

participants’ consent 

before making a 

distribution from an 

account balance that 

exceeds $5,000. 

Employers may cash out 

separating participants’ 

account balances under 

$5,000 from their plan 

without the participants’ 

consent. They may 

compel cashouts of 

balances under $1,000, 

but are required to roll 

over account balances of 

between $1,000 and 

$5,000 into an IRA. 

Hardship 

withdrawals 

Limited to the 

amount of the 

employee’s 

elective 

contributions, 

and generally do 

not include any 

income earned 

on the deferred 

amounts. 

Hardship withdrawal 

distributions must be 

made on account of an 

immediate and heavy 

financial need. The 

financial need may be 

immediate and heavy, 

even if the event was 

reasonably foreseeable 

or voluntarily incurred. A 

distribution is deemed to 

be on account of an 

immediate and heavy 

financial need of the 

employee if the 

distribution is for the 

following: 

• expenses for medical 

care previously 

incurred by the 

employee, the 

employee’s spouse, or 

any dependents of the 

employee or 

necessary for these 

persons to obtain 

medical care; 

Participants must 

provide 

documentation of 

their hardship. 

Federal and state 

income taxes. 

Participants under age 

591⁄2 may be subject to 

10 percent early 

withdrawal penalty. 

Participants are subject 

to 20 percent employer 

withholding. 

A plan may only allow 

hardship withdrawals if 

participants have 

obtained all other 

currently available 

distributions and loans 

under the plan and all 

other plans maintained 

by the employer. 

Participants face a 6-

month suspension of 

contributions to their 

accounts following 

hardship withdrawal. 

Participants may not roll 

over any part of their 

hardship withdrawal into 

an IRA or other qualified 

plan. 

Page 9 GAO-09-715 401(k) Plans
 

Leakage type 

Amount 

restrictions Allowable purpose 

Documentation 

requirements Associated costs Other restrictions 

• costs directly related 

to the purchase of a 

principal residence for 

the employee 

(excluding mortgage 

payments); 

• payment of tuition, 

related educational 

fees, and room and 

board expenses, for 

the next 12 months of 

postsecondary 

education for the 

employee or the 

employee’s spouse, 

children, or 

dependents; 

• payments necessary 

to prevent the eviction 

of the employee from 

the employee’s 

principal residence or 

foreclosure on the 

mortgage on that 

residence; 

• funeral expenses; or 

• certain expenses 

relating to the repair of 

damage to the 

employee’s principal 

residence. 

Loans Up to 50 percent 

of a participant’s 

vested account 

balance or 

$50,000, 

whichever is 

less. 

General purpose. 

Purchase of a primary 

residence. 

None for general 

purpose loans. 

Evidence of 

imminent home 

purchase 

generally required 

for principal 

residence loans. 

Must pay amount back 

to account, with 

interest. 

Loans that are not 

repaid are treated as 

loan defaults and the 

outstanding loan 

balance is removed 

from the plan and sent 

to the participant as a 

taxable distribution of 

income. 

Loan repayments are not 

considered plan 

contributions. 

Participants must repay 

loans in substantially 

equal payments that 

include principal and 

interest. The repayment 

period is within 5 years 

for general purpose 

loans, and is longer for 

primary residence loans. 

Source: GAO analysis of laws and regulations. 

Page 10 GAO-09-715 401(k) Plans
 

Participants tapping into their 401(k) account follow different rules and 

procedures to gain access to their money, depending on whether they take 

a loan, hardship withdrawal, or cashout. Figure 1 describes the process 

that a participant must generally follow to withdraw money using one of 

these options. 

Figure 1: Options Available to Participants to Withdraw Money from a 401(k) Account before Retirement 

Option 2: Hardship withdrawal

As defined by the IRS, the participant must have an immediate and heavy financial need to qualify and no other resources to fill the need.

Sources: GAO (analysis); Art Explosion (images).

401(k) Plan

Option 1: Loan

Most plans allow participants to take a loan for any reason.

The participant then fills out 

an application online or on 

paper and sends it to the plan

The participant contacts

the plan via a call center 

or Web site

The plan sends a check with 

tax notices to the participant 

within 2 days

The participant begins

repayment of the loan via

payroll deduction

If approved, the participant 

receives a check with tax 

notices in the mail 

401(k) Plan

The participant fills out 

a paper application

and mails it to the plan

The plan reviews the 

application and approves or 

denies it

The plan sends the 

participant a hardship 

withdrawal form

The participant 

contacts the plan 

by telephone

APPROVE / DENY

401(k) Plan

401(k) Plan

The participant 

leaves job

The participant receives a

lump-sum distribution from 

the plan and chooses not to 

roll it over into an IRA or 

qualified plan

The plan sends a

termination packet 

informing the participant 

of options for managing 

401(k) account balance

$ $

$

$ $

$

$ $

$

Option 3: Cashout

Participants leaving their jobs have the option of cashing out their account, in part or in full.

The participant receives

termination packet from 

the plan and decides to 

take a lump-sum 

distribution 

Page 11 GAO-09-715 401(k) Plans
 

Leakage Has 

Remained Relatively 

Steady, with Cashouts 

Having the Greatest 

Impact on Retirement 

Savings 

Leakage Has Remained 

Relatively Steady, Even in 

the Poor Economy 

Our estimates—based on SIPP data collected in 1998, 2003, and 2006—

found no statistically significant differences in the overall incidence of 

leakage from 401(k) accounts in the data from the three SIPP panels that 

we analyzed, with approximately 15 percent of participants between ages 

15 and 60 initiating at least one form of leakage.9

 As shown in figure 2, we 

estimated that the percentage of participants experiencing each leakage 

type remained steady across the 3 years, with more participants borrowing 

money from their plans in the form of a loan than taking a cashout or 

hardship withdrawal. 

 

9

We analyzed data from the Pension and Retirement Topical Module collected during wave 

7 for the 1996, 2001, and 2004 SIPP panels. 

Page 12 GAO-09-715 401(k) Plans
 

Figure 2: Estimated Percentage of 401(k) Participants Ages 15 to 60 Reporting 

Leakage, by Leakage Type 

0

5

10

15

20

Any form Cashouts Hardship withdrawals Loans

Percentage

Leakage type

Source: GAO analysis of SIPP data.

1998

2003

2006

16

17

14

7

6

5

8

10

8

4

3 3

Note: The SIPP wave 7 Pension and Retirement Topical Module was collected 2 years after the start 

of the 1996, 2001, and 2004 SIPP panels, respectively. The amounts for the individual forms of 

leakage do not equal the total for the Any form category due to rounding of estimates to the nearest 

percentage. The 95 percent confidence intervals for the estimates shown are as follows. Any form: 

1998 (15.4, 17.1), 2003 (15.7, 17.7), 2006 (13.5, 14.9). Cashouts: 1998 (6.1, 7.2), 2003 (5.5, 6.8), 

2006 (4.7, 5.6). Hardship withdrawals: 1998 (3.5, 4.3), 2003 (2.6, 3.6), 2006 (2.8, 3.6). Loans: 1998 

(7.5, 8.7), 2003 (9.1, 10.7), 2006 (7.5, 8.6). 

Our analysis of SIPP data found significant differences in the amounts of 

leakage, by type, that participants reported taking from their 401(k) plans, 

with the total cashout amounts being significantly higher than the total 

amounts of either hardship withdrawals or loans. As shown in figure 3, we 

estimated that the amount of leakage reported in 2006 was approximately 

$108 billion, with cashouts comprising the bulk of that amount.10

 

10The Pension and Retirement Topical Module for the 2004 SIPP was collected in the 

seventh wave of participant interviews during 2006. 

Page 13 GAO-09-715 401(k) Plans
 

Figure 3: Estimated Total Amounts of Leakage Reported by 401(k) Participants, 

Ages 15 to 60, by Leakage Type 

0

20

40

60

80

100

Cashouts Hardship withdrawals Loans

Dollars in billions

Source: GAO analysis of SIPP data.

Leakage type

1998

2003

2006

72

79

74

9

5

9

22

28

25

Note: The SIPP wave 7 Pension and Retirement Topical Module was collected 2 years after the start 

of the 1996, 2001, and 2004 SIPP panels, respectively. Dollar amounts have been adjusted for 

inflation and are reported in constant calendar year 2008 dollars. The 95 percent confidence intervals 

are expressed in billions of dollars. The 95 percent confidence intervals for the estimates shown are 

as follows. Cashouts: 1998 (65.2, 79.8), 2003 (68.0, 89.6), 2006 (66.5, 81.8). Hardship withdrawals: 

1998 (6.9, 10.2), 2003 (3.8, 6.5), 2006 (7.4, 10.7). Loans: 1998 (19.7, 24.8), 2003 (24.6, 30.5), 2006 

(22.2, 27.4). 

The median amounts of leakage also remained steady in the 3 years of 

SIPP data that we analyzed. According to our estimates, the median 

cashout amount was significantly higher than the median loan amount. 

(See fig. 4.) 

Page 14 GAO-09-715 401(k) Plans
 

Figure 4: Estimated Median Amounts of Leakage Reported by 401(k) Participants, 

Ages 15 to 60, by Leakage Type 

0

1

2

3

4

5

Cashouts Hardship withdrawals Loans

Dollars in thousands

Source: GAO analysis of SIPP data.

Leakage type

1998

2003

2006

3,861

3,470

4,166

3,461

3,060 3,123 3,240

2,574

2,126

Note: The SIPP wave 7 Pension and Retirement Topical Module was collected 2 years after the start 

of the 1996, 2001, and 2004 SIPP panels, respectively. Dollar amounts have been adjusted for 

inflation and are reported in constant calendar year 2008 dollars. The 95 percent confidence intervals 

are expressed in thousands of dollars. The 95 percent confidence intervals for estimates are as 

follows. Cashouts: 1998 (3.8, 4.0), 2003 (3.9, 4.7), 2006 (4.3, 5.7). Hardship Withdrawals: 1998 (2.6, 

4.1), 2003 (2.3, 4.2), 2006 (2.6, 4.2). Loans: 1998 (2.8, 4.0), 2003 (2.4, 3.6), 2006 (2.0, 2.8). 

The overall incidence and amounts of leakage from loans and hardship 

withdrawals also remained steady through 2008, according to data that we 

obtained from selected major 401(k) administrators.11 While these data 

were not nationally representative, they covered a wide spectrum of 

401(k) plans, participants, and assets. As shown in table 3, the overall 

incidence and average amounts of leakage changed little, if at all, from 

2005 through 2008. Two administrators also told us that they had seen 

 

11The three administrators that provided us with recent data represent about 22 million 

401(k) participants and over $1 trillion in 401(k) plan assets. 

Page 15 GAO-09-715 401(k) Plans
 

little change in the number of hardship withdrawals and loans in the first 

quarter of 2009. 

Table 3: Recent Trends in 401(k) Leakage as Reported by Selected Major 401(k) Plan Administrators, 2005 through 2008

2005 2006 2007 2008

Leakage form Administrator 

Average 

amount %

Average 

amount %

Average 

amount % 

Average 

amount %

Loans #1 $8,030 20.0 $8,300 20.0 $8,590 20.0 $8,710 19.0

#2 8,039 18.0 8,260 17.0 8,571 16.0 8,624 16.0

#3 6,091 18.0 7,246 18.0 8,228 18.0 8,657 18.0

Hardship 

withdrawals 

#1 6,070 1.4 6,250 1.5 6,160 1.6 5,960 1.8

#2 6,113 — 6,458 1.5 5,305 1.6 5,821 1.7

#3 7,240 2.1 7,555 2.3 8,038 2.3 8,444 2.4

Source: GAO analysis of data obtained from selected major 401(k) administrators. 

Note: These data from selected 401(k) administrators are not nationally representative and may not 

reflect the estimates provided of nationally representative SIPP data. Not all of the administrators we 

contacted provided comparable data on the incidence and amount of cashouts taken by 401(k) 

participants before turning age 60. 

Taking a cashout, hardship withdrawal, or loan can come with costs that 

can amplify the detrimental effect that leakage can have on a participant’s 

retirement savings. For example, early distributions from a 401(k) 

account, whether in the form of a cashout, hardship withdrawal, or 

defaulted loan, may be subject to a 10 percent tax penalty that must be 

paid in addition to the amount of the distribution. In addition, some plans 

require participants who take a loan to pay an additional loan origination 

fee or periodic loan maintenance fees over the course of the loan 

repayment period. Participants taking hardship withdrawals are subject to 

the 10 percent penalty and must eventually pay federal and state income 

taxes on the hardship withdrawal amount. In addition, the requirement 

that participants suspend all contributions to their plans for 6 months 

following the hardship withdrawal not only prevents participants from 

continuing to make contributions but also precludes them from obtaining 

any employer matching contribution. The additional costs associated with 

cashouts, hardship withdrawal, and defaulted loans can compound 

permanent losses of retirement income by reducing a participant’s balance 

and precluding these amounts from compounding in the account over 

time. 

While the estimated amount of 401(k) leakage is in the billions of dollars, 

it represents a relatively small proportion of the aggregate value of assets 

Page 16 GAO-09-715 401(k) Plans
 

in 401(k) plans. As shown in figure 5, in 2006, leakage resulted in marginal 

losses in retirement savings in aggregate. Yet, at the level of the individual 

participant, leakage can create considerable displacement of retirement 

savings. 

Figure 5: Illustration of 401(k) Leakage as a Proportion of Overall 401(k) Plan Assets 

in 2006 

Sources: GAO analysis of Department of Labor and Census data; Art Explosion (images).

Employer 

matching 

contributions

Cashouts

at job change

Loan defaults

Hardship

withdrawals

($561 million)

($9 billion) 

($74 billion)

401(k) assets

$2.7 trillion

$

$

$ $ $ $

$

$

$

Participant 

contributions

$

$

$ $

Cashouts Can Have the 

Greatest Impact on 

Retirement Savings 

Cashouts at job separation can have the greatest impact of the principal 

forms of leakage on an individual participant’s savings, according to the 

results of our analysis. We simulated a range of leakage scenarios that 

took into account the age, earnings, and job tenure of participants as well 

as a range of leakage amounts. We found that cashouts of any amount at 

job separation—whether taken in part or in full—can have a greater effect 

on a participant’s account balance at age 65 than comparable amounts 

taken in the form of a hardship withdrawal or loan. As shown in table 4, 

cashouts resulted in a greater proportional loss of retirement savings 

among low-wage earners, especially those who took a partial cashout 

earlier in their working careers. 

Page 17 GAO-09-715 401(k) Plans
 

Table 4: Illustration of the Effect of a $5,000 Loan, Hardship Withdrawal, or Cashout on a Participant’s 401(k) Account, by Age 

and Wage Level 

No leakage 

Loan 

($5,000) 

Hardship withdrawal 

($5,000) 

Partial cashout 

($5,000) 

Age 

Wage 

level 

Average 

annual 

earnings 

Account 

balance at 

age 65 %

Account 

balance at 

age 65 % 

Account 

balance at 

age 65 % 

Account 

balance at 

age 65 % 

35 

Low $16,444 $264,624 100.0 $264,075 99.8 $233,607 88.3 $230,035 86.9

Medium 36,546 588,049 100.0 587,500 99.9 552,597 94.0 544,658 92.6

High 58,497 940,839 100.0 940,290 99.9 900,506 95.7 887,836 94.4

45 

Low $26,383 $264,624 100.0 $264,331 99.9 $243,873 92.2 $240,341 90.8

Medium 58,606 588,049 100.0 587,756 100.0 562,860 95.7 555,013 94.4

High 93,802 940,839 100.0 940,546 100.0 910,802 96.8 898,243 95.5

55 

Low $36,105 $264,624 100.0 $264,447 99.9 $252,090 95.3 $249,347 94.2 

Medium 80,252 588,049 100.0 587,873 100.0 572,064 97.3 565,968 96.2

High 128,418 940,839 100.0 940,663 100.0 921,090 97.9 911,334 96.9

Source: GAO. 

Note: These illustrations are based on an individual who is born at the beginning of 1970, begins 

participating in a 401(k) plan at age 21 in 1991, and retires at age 65 in 2035. We adopt the 

intermediate interest and rate-of-return assumptions as reported in past and projected in Social 

Security’s most recent Old-Age, Survivors, and Disability Insurance (OASDI) Trustees’ Report and for 

low, medium, and high annual earnings. Employee contributions are 6 percent and receive a 3 

percent employer matching contribution. We assume that loans are taken out at the beginning of the 

year that the individual reaches the age indicated, loans incur a $100 fee deducted from the account 

balance, and loans are repaid in 5 years at a fixed interest rate equal to the rate of return at the time 

that the loan is made. Participants who reduce their rate of contributions while making loan payments 

will experience a greater reduction in their account balance at age 65. We assume that hardship 

withdrawals are taken out at the beginning of the year that the individual reaches the age indicated 

and follow the rules. We assume that partial cashouts are taken out at the beginning of the year that 

the individual reaches the age indicated, partial cashouts incur the 10 percent early withdrawal 

penalty, and the individual does not resume elective or employer matching contributions to a 401(k) 

account for 12 months following the distribution, to allow for any delay in the resumption of 

employment or a waiting period before beginning to participate in a new employer’s 401(k) plan, or 

both. Individuals who take a partial cashout and resume contributions to a 401(k) plan prior to the end 

of a 12-month period would under certain circumstances experience less leakage from their account 

balance at age 65. For example, a participant taking a cashout at job change who experienced no 

interruption in contributions would have a higher account balance at age 65 than if he or she had 

taken a hardship withdrawal for the same amount. 

Participants who voluntarily cashed out their entire 401(k) account 

balance at job separation experienced the largest reductions in the amount 

of retirement savings that accumulate over their working careers. As 

shown in table 5, unlike partial cashouts, which leave some assets in the 

plan to grow over time, total cashouts can significantly reduce a 

Page 18 GAO-09-715 401(k) Plans
 

participant’s retirement savings, even when the participant experiences no 

interruption of 401(k) contributions. Cashouts can be especially damaging 

if taken later in a career when a participant has less time to recover the 

losses. For example, table 5 also shows that if a participant were to cash 

out their plan at age 35, their account balance at age 65 would be $404,431, 

or $183,618 less than had they left the money in their account. 

Table 5: Illustration of the Effect of Cashing Out the Entire 401(k) Account Balance at Job Separation, for Medium-Income 

Earners 

401(k) account balance at age 65 Decrease in account balance 

Age at which 

cashout occurs With no leakage After total cashout

Total cashout from 

401(k) plana

Amount Percent

25 $588,049 $551,256 $4,214 $36,794 6

30 588,049 482,675 16,538 105,375 18

35 588,049 404,431 36,874 183,618 31

40 588,049 323,036 65,240 265,013 45

45 588,049 241,382 111,392 346,667 59

50 588,049 164,174 180,632 423,876 72

55 588,049 95,329 279,022 492,720 84

Source: GAO. 

Note: These illustrations are based on an individual who is born at the beginning of 1970, begins 

participating in a 401(k) plan at age 21 in 1991, and retires at age 65 in 2035. We adopt the 

intermediate interest and rate-of-return assumptions as reported in past and projected in Social 

Security’s 2009 OASDI Trustees’ Report and use their medium level for annual earnings. Employee 

contributions are 6 percent and receive a 3 percent employer matching contribution. These full 

cashouts incur a 10 percent tax penalty for early withdrawal, which is included in the amount cashed 

out from the 401(k) plan, and are taken out at the beginning of the year that the individual reaches the 

age indicated. We assume that the individual resumes employment immediately following the job 

separation and continues his or her own and matching contributions at the same level without 

interruption. Any interruption in 401(k) contributions—such as unemployment or a waiting period 

before an individual can participate—would further reduce the 401(k) account balance at age 65. 

a

This amount represents the amount that an participant earning a medium income could have 

accumulated by the age in which the cashout occurred, assuming a steady 6 percent elective 

participant contribution and a 3 percent employer matching contribution. 

Hardship Withdrawals Can 

Result in Large Reductions 

in Retirement Savings 

Participants who initiated hardship withdrawals also experienced large 

reductions in their retirement savings over their careers. While slightly less 

than the amounts lost due to cashouts, hardship withdrawals can result in 

permanent loss of retirement income and may affect participants at a time 

when they face greater difficulty in recouping the losses. In our analysis of 

various leakage scenarios, we found that among all age and income levels, 

hardship withdrawals had the greatest impact on low-income and younger 

participants. For example, our simulation showed that a low-earning 35-

year-old participant taking a $5,000 hardship withdrawal would forgo 12 

Page 19 GAO-09-715 401(k) Plans
 

percent in retirement savings resulting from the hardship, whereas a highearning participant of the same age would forgo less than 5 percent due to 

higher contribution amounts. Larger hardship withdrawal amounts taken 

earlier in a participant’s career had the greatest proportional impact on 

participants who earned lower incomes. 

Loans Have the Least 

Damaging Effect on 

Retirement Savings 

Of the three principal forms of leakage that experts identified, loans paid 

back to the plan in regular installments are the least damaging, because 

participants are able to recover most of their losses, regardless of their age 

or earnings level. While the overall amount of participant loans has 

increased since 1996, as shown in figure 6, this rise roughly paced the 

overall growth in the number of 401(k) participants. 

Figure 6: Outstanding Participant Loan Balances and Number of Active 401(k) 

Participants, 1996 through 2006 

0

5

10

15

20

25

30

35

40

45

50

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

10

20

30

40

50

60

70

Dollars in billions Number of participants in millions

Source: GAO analysis of Department of Labor’s Form 5500 Annual Reports.

Year

Active participants

Outstanding loan balances

Note: Dollar amounts are reported in constant 2008 dollars. 

Experts told us that participant loans constitute limited leakage only when 

they are not paid back to the plan, even though there may be costs, such as 

paying loan fees, which could reduce participant balances. Like cashouts, 

Page 20 GAO-09-715 401(k) Plans
 

the outstanding balance of a defaulted loan is distributed to the participant 

as income and is subject to the 10 percent penalty and various taxes. 

According to the most recent data available from Labor, the amount of 

loan defaults from 401(k) plans ranged from a low of $359 million to a high 

of $666 million in the period of 1999 through 2006. (See fig. 7.) 

Figure 7: Loan Default Amounts Reported by 401(k) Plans, 1999 through 2006 

Note: Dollar amounts are reported in constant 2008 dollars. 

Plans have some security against default on a participant loan because 

loan repayments are automatically deducted from a participant’s paycheck 

as long as the participant is employed. However, under current rules, 

participants who separate from their employer and have an outstanding 

loan balance generally must repay the loan balance in full shortly after 

their separation.12 For participants who face involuntary job separation, 

such as a layoff, the requirement to repay the loan in full may create a 

burden. Like cashouts, the larger the loan balance when the participant 

 

12In some cases, participants who separate from one employer with an outstanding loan 

balance can transfer that balance over to their new employer and continue making 

repayments. Other plans allow former participants to make loan payments by check, 

although administrators told us that the administrative costs of doing so were high. 

Page 21 GAO-09-715 401(k) Plans
 

defaults, the greater the impact the loan default can have on a participant’s 

retirement savings. Table 6 illustrates the effect of a loan default on a 

participant’s retirement savings at age 65. 

Table 6: Illustration of the Effect of Defaulting on a $5,000 Loan after 1 Year of 

Repayment, for a Medium-Income 401(k) Participant 

401(k) account balance at 

age 65 

Decrease in account 

balance 

Age when loan default 

occurs 

If loan is 

repaid

If loan 

defaults after 

1 year Amount Percent

35 $587,500 $566,121 $21,379 4

45 587,756 574,445 13,311 2

55 587,873 580,330 7,543 1

Source: GAO. 

Note: These illustrations are based on an individual who is born at the beginning of 1970, begins 

participating in a 401(k) plan at age 21 in 1991, and retires at age 65 in 2035. We adopt the 

intermediate interest and rate-of-return assumptions as reported in past and projected in Social 

Security’s 2009 OASDI Trustees’ Report and use their medium level for annual earnings. Employee 

contributions are 6 percent and receive a 3 percent employer matching contribution. Loans incur a 

$100 fee deducted from the account balance, are taken out at the beginning of the year that the 

individual reaches the age indicated, and are repaid for a year at a fixed interest rate equal to the rate 

of return at the time the loan is made and then the borrower defaults on the outstanding balance. This 

outstanding balance is treated as an early withdrawal and incurs a 10 percent tax penalty for early 

withdrawal. 

Loan defaults may affect participants differently, depending on whether 

job separation is voluntary or involuntary. For example, loan defaults can 

adversely affect participants who, after securing a loan from their account, 

suddenly find themselves laid off by their employers. These participants 

will typically be required to repay the amount of the loan back to the plan 

in full within a short time frame. Participants who cannot or do not repay 

their loan balance in full must generally pay the 10 percent penalty and 

income taxes on the outstanding amount that is distributed to them as 

income, resulting in a loss of retirement savings.13

 

13According to Treasury officials, a distribution from a 401(k) accounts as a result of a loan 

default could compel some lower-income earners to pay income taxes when they otherwise 

would not be compelled to do so. 

Page 22 GAO-09-715 401(k) Plans
 

Plans Used Various 

Means to Inform 

Participants about 

Withdrawal 

Provisions, but Few 

Alerted Them to the 

Negative Long-term 

Implications 

Plans Used Various Means 

to Inform Participants 

about Leakage Provisions 

Federal law requires plans to provide several mandatory written 

communications to participants that contain information on the various 

provisions affecting cashouts, hardship withdrawals, and loans. As shown 

in table 7, for each document, the law defines the type of information to be 

included and the timing of the delivery. 

Table 7: Mandatory Disclosures Provided to 401(k) Plan Participants 

Document Information included Timing 

Summary plan description 

(SPD) 

Plans must provide information to plan participants 

about the plan, and how it operates, and must 

apprise participants of their benefits, rights, and 

obligations under the plan. The SPD would include 

the availability of loan, hardship withdrawal, and 

cashout provisions. 

(29 C.F.R. § 2520.102-2 and § 2520.102-3) 

Sent to participants within 90 days of becoming 

covered by the plan. The SPD must be furnished 

every 5 years, if amended or otherwise once every 

10 years. 

(29 C.F.R. § 2520.104b-2) 

Summary of material 

modifications (SMM) 

Plans must provide a new SPD or SMM whenever 

the SPD is amended. The SMM must describe plan 

modifications and changes. Distribution of an 

updated SPD fulfills this requirement. The SMM may 

include any changes in the availability of loan, 

hardship withdrawal, and cashout provisions. 

(29 C.F.R. § 2520.104b-3) 

Provided no later than 210 days after the end of 

the plan year in which the change is adopted. 

402(f) special tax notice Plans must provide a tax notice to participants at 

termination explaining the rollover rules, the special 

tax treatment for lump-sum distributions, and the 

mandatory 20 percent withholding rules. The notice 

may be sent via mail or e-mail. This notice is sent to 

all terminating participants. 

(26 C.F.R. § 1.402(f)-1, Q/A-2; Q/A-5) 

Provided no more than 90 days (as much as 180 

days for plan years that begin after December 31, 

2006) and no fewer than 30 days before making 

an eligible rollover distribution. 

Source: GAO analysis of law and regulations from the Internal Revenue Service and the Department of Labor. 

Page 23 GAO-09-715 401(k) Plans
 

Plan officials we contacted told us that one way participants could learn 

about their plans’ loan and withdrawal provisions is through the summary 

plan description (SPD). Some plan officials told us that they developed 

reader-friendly highlights of the SPD to communicate the plan procedures 

to participants. For example, the SPD highlights from one plan explained 

the following provisions on one page: participant eligibility, contribution 

amount, rollover contributions, the employer match, vesting, the 

investment choices, loans, and withdrawals. Officials that we contacted 

told us that the highlights documents are kept intentionally vague out of 

concern that participants might rely on these documents, rather than the 

actual SPD. However, one plan official and one expert stated that the 

extent to which participants understand the information and use it to 

make informed choices about their accounts remains unknown. 

Plans that we contacted provided participants with information on leakage 

at three distinct points determined by federal requirements: at enrollment, 

when a loan or hardship withdrawal is requested, and at job termination. 

Some plans that we contacted provided participants with information 

about loans and hardship withdrawals in the participant’s initial 

enrollment package. Other plans that we contacted provided participants 

with information beyond federally required notices at the participant’s 

request. Another plan sent out a termination package when a plan sponsor 

sent notification of a participant’s termination date, while another plan 

waited for the participant to contact the plan upon job termination. 

According to some plan officials, participants inquire about plan 

provisions when a triggering event occurs, such as when the participants 

need access to money in their account or when they are separating from 

their job. Participants, however, may request information about 

withdrawing money from their accounts at any time. 

Apart from meeting federal requirements, plans have varying levels of 

involvement with participants, ranging from plans seeking to protect 

participants from making poor decisions with respect to cashouts, 

hardship withdrawals, or loans, to plans giving participants little advice on 

how leakage would affect their retirement accounts. Some plans we 

contacted provided participants with detailed information that went 

beyond the legally mandated disclosures about the implications of 

cashouts, hardship withdrawals, and loans. Some plan officials we 

contacted stated that they gave no information to participants about the 

effects of cashouts, hardship withdrawals, and loans on retirement 

account balances to participants for fear of being perceived as offering 

advice and potentially violating their fiduciary duty to the plan. According 

to EBSA officials, providing investment advice is not a per se violation of 

Page 24 GAO-09-715 401(k) Plans
 

fiduciary duty. Other plan officials that we contacted told us that while 

they wanted to make sure that participants understood the impact of 

withdrawing money from their accounts, they did not want to tell 

participants that they should not take a distribution. 

Some plans that we contacted also staffed call centers to answer 

participants’ questions about their accounts, which they said also included 

topics related to the principal forms of leakage. Call center representatives 

had immediate access to participant account information, could inform 

participants about their range of options for withdrawing money from 

their accounts, and could discuss the mandatory federal disclosures with 

the participants. At one participant call center, plan officials demonstrated 

how the representatives would respond to a participant requesting 

information about acquiring a loan, about a hardship withdrawal, or about 

the management of their account balance at job termination. Some plan 

officials said that they trained call center representatives to inform 

participants of the available options, while other plans told us that they 

sought to dissuade participants from taking a hardship withdrawal. One 

plan that we contacted required participants to contact the call center at 

job termination, so that the representative could counsel the participant 

on the best option for that individual. 

Plan officials told us that younger participants preferred to use the plan 

Web sites to locate the information they needed. Some plans that we 

contacted had plan documents available online, such as hardship 

withdrawal applications and procedures, providing participants with 

immediate access to information about the processes and impacts of 

withdrawing money from their account. Plan officials told us that some 

Web-based communications often provided the same information available 

to plan participants in print, while other Web-based communications were 

less comprehensive than the written information available to participants. 

Some plans that we contacted also utilized plan Web sites to notify 

participants of the amount of money available for a cashout, hardship 

withdrawal, or loan. One plan also provided a 5- to 10-minute online 

course outlining the impact of leakage on the participant’s long-term 

savings. Two plans that we contacted included information on leakage in 

articles on plan Web sites to educate participants about the consequences 

of borrowing from their 401(k) accounts. However, few plans that we 

contacted had tools on their Web sites for participants to project the 

potential impact of cashouts, hardship withdrawals, and loans on their 

future retirement savings. 

Page 25 GAO-09-715 401(k) Plans
 

Some plan officials told us that plans had begun providing just-in-time 

information on 401(k) leakage to participants entering certain life phases 

to better meet the participants’ needs. Regarding cashouts, for example, 

one plan provided each separating participant with a worksheet that 

contained a personalized projection of their current 401(k) account 

balance, comparing dollar-for-dollar the advantages of keeping the 

account tax-deferred by rolling it over into a qualified plan or IRA with the 

consequences of cashing the balance out and paying the associated 

penalties and taxes. Officials at another plan told us that when an 

employer notified them that a large number of employees were facing an 

imminent layoff, they would create a campaign to educate participants 

about the steps they needed to take to preserve their account balances 

after the layoff. Regarding hardship withdrawals, some plans told us that 

they contacted participants after the 6-month suspension period to inform 

them that they could reenroll in the 401(k) plan. Another plan 

automatically reenrolled participants in their 401(k) plan after the 6-month 

suspension period. Officials at one plan told us that they sought to 

intercept participants requesting a disbursement from their retirement 

account, discussing with the participant on the telephone the 

consequences of withdrawing the money. Regarding loans, some plans 

request that the plan administrator set up on-site seminars to cover 

various topics, such as the consequences of job termination on a 

participant’s outstanding loan. 

Most Plans Informed 

Participants about the 

Short-term Costs of 

Leakage, but Few 

Informed Participants 

about the Long-term 

Implications 

Almost all of the plans contacted told us that they sent a termination 

package to participants at job separation that outlined the available 

options for their account balance, but that these documents did not 

contain information on the long-term implications of choosing to take a 

cashout. These options included leaving the balance in the plan, rolling the 

balance over into another employer-sponsored plan or IRA, or cashing out 

their account balance. For example, one plan’s standard termination 

package included a document with information on the options available to 

participants at termination, and on whom to call for more information, and 

included a one-page summary illustrating the short-term effects of cashing 

out of the plan. Few plans that we contacted told us that they had tools on 

their Web sites, such as calculators, for participants to project the 

potential effect on their future retirement savings of taking a cashout. 

Plan officials told us that they included information on the short-term 

costs of hardship withdrawals, as required, whenever a participant 

requested the hardship withdrawal. Hardship withdrawals come with a 

number of short-term costs, including the 10 percent early withdrawal 

Page 26 GAO-09-715 401(k) Plans
 

penalty, the 6-month contribution suspension period, the inability to return 

the withdrawn sum back to the plan, and the participant’s potential 

personal tax liability resulting from the withdrawal.14 Many of the plans 

that we contacted required participants to send a hard-copy of the 

hardship withdrawal application to the plan, and some plans required 

participants to contact their plan administrator or sponsor to request a 

hardship withdrawal. While participants received information on the shortterm costs associated with a hardship withdrawal, the plans that we 

contacted provided little information on the long-term implications of a 

hardship withdrawal on retirement savings. Some plan officials told us 

that they did not provide participants with any information on the longterm effects on retirement of taking a hardship withdrawal. 

Plan officials told us that plans informed participants about the short-term 

costs of loans—including the loan amount, repayment schedule, and tax 

consequences—through the plans’ call centers, Web sites, or publications. 

Some plan officials told us that even though they informed participants of 

the short-term costs associated with taking a loan, information about the 

long-term implications was largely omitted because as long as the loan is 

repaid, it has a small overall impact on account balances. Some plan 

officials that we contacted said that the loan check sent to the participant 

also included a loan repayment schedule, information on the tax 

consequences of taking the loan, and the effects of defaulting on the loan. 

Plans that we contacted also told us that plan Web sites offered 

participants loan calculators to help the participant determine how much 

the loan repayment would cost per pay period, and also offered articles 

designed to educate participants about the consequences of borrowing 

from their account. Some plans that we contacted offered loan modeling 

tools that allowed participants to estimate the short-term impact of the 

loan on their retirement balance. For example, one plan provided 

participants with an online calculator tool that allows participants to 

determine what effect a loan and its associated tax implications might 

have on their future retirement benefit. However, few plans that we 

contacted provided participants with information on the long-term 

consequences of taking loans from their accounts. 

 

14These costs are short term because participants experience them shortly after taking a 

hardship distribution. However, each of these costs has long-term implications on a 

participant’s retirement balance. 

Page 27 GAO-09-715 401(k) Plans
 

Experts Said That 

Some Statutory 

Provisions Have 

Helped Reduce 

Leakage 

Three Statutory Provisions 

Are Said to Have Helped 

Reduce Leakage 

The experts that we contacted said that the 10 percent penalty on early 

withdrawals had likely reduced the incidence and amount of leakage 

among 401(k) participants, but that its function as a disincentive could be 

strengthened. One expert told us that he believed that the penalty had 

significantly reduced the number of cashouts being taken from 401(k) 

plans. Other experts noted that the penalty served as a deterrent because 

participants were generally reluctant to pay penalties, regardless of the 

amount. A plan administrator told us that many participants contacting the 

call center to inquire about a hardship withdrawal had reacted negatively 

to the information that they would be required to pay a 10 percent penalty. 

Some experts questioned whether the 10 percent penalty’s power as a 

disincentive needed to be strengthened to further discourage participants 

from removing money from their accounts. Some felt that the percentage 

was too low to have any major impact as a deterrent and suggested that 

the penalty needed to be increased to further discourage participants from 

taking early withdrawals. For example, one expert noted that young 

workers who receive a distribution after leaving their first job may regard 

the distribution as free money, and the penalty would only reduce the 

amount of free money they received. Another expert said that the penalty 

served more as a speed bump than as a deterrent for participants earning 

higher incomes. Other experts noted that the provision did not deter 

participants who were facing true hardships and needed money from their 

accounts, regardless of the penalty assessed. 

Early Withdrawal Penalty 

Provision 

Because the incidence and amount of leakage from 401(k) accounts have 

remained relatively steady, the 10 percent penalty has continued to 

provide a steady source of revenue to IRS. Officials told us that the penalty 

serves a dual purpose: it deters participants from tapping into their 401(k) 

account when they have other sources of money available, and it allows 

the federal government to recoup a portion of the subsidy provided to 

Page 28 GAO-09-715 401(k) Plans
 

keep the money tax-deferred. According to published IRS data on early 

withdrawals from qualified retirement plans, including 401(k) plans and 

IRAs, more than 5 million tax filers paid $4.6 billion in early withdrawal 

penalties in tax year 2006. As shown in figure 8, the amount of early 

withdrawal penalties paid has increased since 1996, while the average 

penalty paid per tax return has stayed about the same. 

Figure 8: Penalty Taxes Paid on Early Withdrawals from Qualified Retirement Plans 

and Average Penalty Paid, 1996 through 2006 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

200

400

600

800

1,000

1,200

Dollars in billions Average amount per return

Source: GAO analysis of IRS data.

Year

Average penalty paid per tax return

Early withdrawal penalties paid

Note: These IRS data include 401(k) participants as well as participants in other qualified retirement 

plans, including IRAs. As a result, we were unable to isolate the total amount of penalties paid by 

401(k) participants. All dollar amounts are reported in constant 2008 dollars. 

Experts said that the provision that lowered the threshold for plan 

sponsors to cash out the accounts of separating participants automatically 

has likely reduced the overall incidence of leakage. Prior to this provision, 

employers could compel mandatory cashouts for separating participants 

with account balances under $5,000. The change reduced the threshold for 

an automatic cashout to account balances valued at less than $1,000. For 

account balances valued at between $1,000 and $5,000, employers were 

required to preserve the tax-deferred status of the accounts, either by 

Automatic Cashout Provision 

Page 29 GAO-09-715 401(k) Plans
 

keeping the assets in the plan or rolling the balances over into an IRA. 

Several experts noted that the provision had dramatically reduced the 

incidence of leakage for participants with balances of between $1,000 and 

$5,000, but the overall effect was marginal because this group represents a 

small proportion of the participant population. 

We developed an illustration to show the maximum savings that could be 

preserved over the course of a participant’s working career under the 

automatic cashout provision. Our illustration showed that the reduction in 

the maximum cashout amount could result in greater savings over time. 

(See table 8.) 

Table 8: Illustration of the Effect of the Reduction in the Cashout Amount on the Account Balance of a Medium-Income 401(k) 

Participant at Age 65 

Age when cashout 

occurs 

Decrease in account balance, 

with maximum $5,000 cashout

Decrease in account balance, 

with maximum $1,000 cashout 

Maximum amount preserved 

under the cashout provision

25 $41,405 $8,281 $33,124

30 30,479 6,096 24,383

35 23,952 4,790 19,162

40 19,614 3,923 15,691

45 15,123 3,025 12,099

50 11,484 2,297 9,187

55 8,704 1,741 6,963

Source: GAO. 

Note: These illustrations are based on an individual who is born at the beginning of 1970, begins 

participating in a 401(k) plan at age 21 in 1991, and retires at age 65 in 2035. We adopt the 

intermediate interest and rate-of-return assumptions as reported in past and projected in Social 

Security’s most recent 2009 OASDI Trustees’ Report. Involuntary cashouts, as evaluated, are not 

rolled over to a qualified retirement account, are taken out at the beginning of the year that the 

individual reaches the age indicated, and incur the 10 percent tax penalty for early withdrawal. 

Experts said that the provision requiring participants in 401(k) plans to 

exhaust their plan’s loan provisions before taking a hardship withdrawal 

had likely reduced leakage by promoting the use of loans that are 

generally repaid and returned to the plan. Experts said that the provision, 

which reduces hardship withdrawals, was a good rule and made financial 

sense. One expert said that because loans remain in the plan as an 

investment and retain assets when repaid, they resulted in minimal 

leakage. In contrast, hardship withdrawals result in the permanent 

removal of assets from the plan and cannot be returned to a tax-deferred 

account. Thus, taking a loan prior to a hardship withdrawal would 

preserve more assets for retirement. One expert told us that it was 

important for participants to exhaust their loans to reaffirm that the 

Loan Exhaustion Provision 

Page 30 GAO-09-715 401(k) Plans
 

hardship exists and is long-term in nature, and the expert emphasized that 

it was the responsibility of the plan administrator to demonstrate that the 

hardship withdrawal was the participant’s loan of last resort. Another 

expert noted that while the rule made financial sense, plan sponsors 

needed to more actively encourage this practice, and not simply allow 

participants to take a hardship withdrawal each time they faced a situation 

that fell within the IRS definition of a hardship. 

In January 2009, as a result of its compliance monitoring examinations, 

IRS reported the failure of plans to meet hardship distribution 

requirements as one of the top 10 issues facing 401(k) plans. Among other 

things, IRS found that administrators of plans that offer participant loans 

and hardship withdrawals are allowing participants to take hardship 

withdrawals without first exhausting the plan’s loan provisions, as is 

currently required.15 Plan administrators that we contacted said that most 

of their plans strictly adhered to this provision; however, others stated that 

some plans were not enforcing the provision. Several plan administrators 

told us that some plans took participants at their word that they were 

facing a hardship or believed that it was the plan sponsor’s decision 

whether to fulfill this requirement. For example, officials at one plan told 

us that they asked participants whether they had taken a loan before 

granting a hardship withdrawal, but that they did not verify the 

participants’ responses. Other plan administrators told us that they 

believed that the requirement applied to some but not all 401(k) plans. 

Under current rules, the loan exhaustion provision applies to all plans that 

offer loans and hardship withdrawals, but there is no requirement for 

plans to document compliance with this provision. 

Our illustration shows the amount of retirement savings that could be 

preserved by adhering to this provision. Specifically, we calculated the 

effect on the growth in retirement savings for a medium-income 

participant who obtained a combination of a $2,500 loan and a $2,500 

hardship withdrawal, rather than taking a $5,000 hardship withdrawal. As 

shown in figure 9, participants obtaining even a portion of the needed 

 

15IRS Reg. 26 C.F.R. § 1.401(k)-1(d)(3)(iv)(E), which applies to all 401(k) plans, states that a 

distribution is deemed necessary to satisfy an immediate and heavy financial need of an 

employee if (1) the employee has obtained all other currently available distributions and 

loans under the plan and all other plans maintained by the employer and (2) the employee 

is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, 

from making elective contributions and employee contributions to the plan and all other 

plans maintained by the employer for at least 6 months after receipt of the hardship 

distribution. 

Page 31 GAO-09-715 401(k) Plans
 

amount in the form of a loan could result in additional retirement savings 

over the course of a working career. 

Figure 9: Illustration of the Effect of Removing $5,000 from a 401(k) Account by 

Taking a Loan before a Hardship Withdrawal, on the Account Balance of a MediumIncome Participant at Age 65 

530

540

550

560

570

580

590

600

35 45 55

0

Dollars in thousands

Source: GAO.

Age

No leakage

Hardship/Loan

Hardship only

588

566

553

571

563

588

577

572

588

Note: These illustrations are based on an individual who is born at the beginning of 1970, begins 

participating in a 401(k) plan at age 21 in 1991, and retires at age 65 in 2035. We adopt the 

intermediate interest and rate-of-return assumptions as reported in past and projected in Social 

Security’s most recent 2009 OASDI Trustees’ Report and use their medium level for annual earnings. 

Employee contributions are 6 percent and receive a 3 percent employer matching contribution. Loans 

incur a $100 fee deducted from the account balance, are taken out at the beginning of the year that 

the individual reaches the age indicated, and are repaid in 5 years at a fixed interest rate equal to the 

rate of return at the time the loan is made. Hardship withdrawals incur a 10 percent tax penalty for 

early withdrawal, are taken out at the beginning of the year the individual reaches the age indicated, 

and participant contributions and employer matching contributions are suspended for a period of 6 

months. The simple hardship withdrawal case assumes a $5,000 withdrawal, while the hardship 

withdrawal and loan combination divides the $5,000 into a $2,500 loan and a $2,500 hardship 

withdrawal. While the individual’s contributions are suspended for 6 months subsequent to receiving a 

hardship withdrawal, loan repayments continue for the entire 5-year repayment period, including the 6 

months during which regular and matching contributions are suspended. 

Page 32 GAO-09-715 401(k) Plans
 

Experts Said That the 

Provision Requiring 

Suspension of 

Contributions May 

Exacerbate the Long-term 

Effects of Leakage 

Experts noted that the statutory provision requiring a 6-month suspension 

of participant contributions following a hardship withdrawal may increase 

the amount of leakage by prohibiting those participants who can 

contribute to their 401(k) accounts from doing so. Treasury officials told 

us that the suspension period was intended to serve as a test to ensure that 

the hardship was real, and that the participant did not have other assets 

available to address the hardship. Many of the experts noted that the 

provision did little to deter participants from taking hardship withdrawals. 

For example, one expert told us that while the provision may have had 

some effect as a deterrent to taking a hardship in theory; in practice, it 

only affected people already experiencing a hardship. 

Other experts noted that the provision seemed to contradict the goal of 

creating retirement income. One expert said that the provision 

unnecessarily kept able participants from making contributions, such as 

an employee who needed an infusion of cash for a discrete, one-time 

event, such as a home purchase. Other experts characterized the 

suspension period as excessive and more of an inconvenience than an 

effective deterrent. For example, one expert noted, participants who need 

money and initiate hardship withdrawals must pay taxes and penalties and 

are prevented from making contributions, leaving them with 50 percent or 

less of the money they had withdrawn. Several experts suggested 

remedies, such as shortening or repealing the suspension period, or 

allowing participants to at least keep their employer match during the 

suspension period to begin making up lost ground. 

Our illustration shows the effect of the 6-month suspension on the 

accumulation of retirement income. As shown in table 9, the suspension 

period would have the greatest impact on the retirement savings of 

midcareer participants earning a medium income. 

Page 33 GAO-09-715 401(k) Plans
 

Table 9: Illustration of the Effect of Suspending Participant Contributions Following 

a $5,000 Hardship Withdrawal on a Medium-Income Participant’s Account Balance 

at Age 65 

401(k) account balance at age 65 

Age at which 

hardship withdrawal 

is taken 

With no 

suspension

With 6-month 

suspension 

Potential losses 

attributable to 

suspension of 

contributions

25 $540,023 $533,886 $6,137

35 560,661 552,574 8,088

45 570,933 562,860 8,073

55 578,337 572,064 6,272

Source: GAO. 

Note: These illustrations are based on an individual who is born at the beginning of 1970, begins 

participating in a 401(k) plan at age 21 in 1991, and retires at age 65 in 2035. We adopt the 

intermediate interest and rate-of-return assumptions as reported in past and projected in Social 

Security’s most recent 2009 OASDI Trustees’ Report. Employee contributions are 6 percent and 

receive a 3 percent employer matching contribution. The $5,000 hardship withdrawals incur a 10 

percent tax penalty for early withdrawal and are taken out at the beginning of the year that the 

individual reaches the age indicated. We contrast the age 65 401(k) account balance when 

participant contributions and employer matching contributions are suspended for a period of 6 months 

and when contributions continue without suspension. In this table, we calculated the forgone savings 

associated with the suspension of a 6 percent employee contribution and a 3 percent employer 

matching contribution for a period of 6 months. Totals do not add due to rounding. 

Finally, several experts noted that the 401(k) hardship withdrawal 

definition was too broad and gave participants access to money for 

circumstances that were both voluntary and foreseeable. For example, 

under current rules, participants may take a hardship withdrawal for 

purchasing their primary residence, which some experts said did not 

constitute an immediate and heavy financial need. Moreover, the 401(k) 

definition of hardship differs from hardship equivalents under other 

qualified plans, such as 457(b) retirement plans.16 Under a 457(b) plan, for 

example, a participant may take a hardship distribution only when faced 

with an unforeseeable emergency, which the regulations define as a severe 

financial hardship resulting from an illness or accident, loss of property 

due to casualty, or other similar extraordinary and unforeseeable 

circumstances arising as a result of events beyond the control of the 

participant or beneficiary. In addition, the regulations also state that the 

 

16The 457(b) plans are deferred compensation plans available for certain state and local 

governments and nongovernmental tax-exempt entities. 

Page 34 GAO-09-715 401(k) Plans
 

purchase of a home and the payment of college tuition are generally not 

unforeseeable emergencies. 

There are many reasons why participants may choose to use their 

retirement savings prior to retirement, and some of these choices may 

involve a rational trade-off between immediate financial emergencies and 

future retirement needs. U.S. workers continue to feel the effects of the 

current economic downturn in the form of job losses, home foreclosures, 

and the depreciation of 401(k) retirement savings. With home values down 

and lending sometimes difficult to obtain, some workers may see their 

accrued 401(k) savings as their last protection against financial hardship. 

Yet, even small amounts of leakage can have a significant impact on the 

retirement savings of some plan participants. 

Conclusions 

While tapping into a 401(k) account to meet short-term needs may be 

rational under certain circumstances, some leakage could be mitigated if 

participants had adequate information on the long-term implications of 

their actions. Cashouts can be the most damaging form of 401(k) leakage, 

are the least regulated, and appear to run counter to the goal of retirement 

savings. However, many participants continue to take this option when 

separating from their employer, in part because the option is often 

presented to them with little or no information on its long-term 

consequences. With better information on the consequences of the various 

forms of leakage, participants may choose to preserve their retirement 

savings, resulting in a better retirement outcome. 

Participants facing sudden and unanticipated hardships would also benefit 

from the assurance that they are using the most appropriate and least 

damaging option, thereby minimizing the negative impacts on their overall 

retirement preparedness. For example, to avoid unnecessary leakage, 

employers should not approve participants for hardship withdrawals until 

they are certain that participants have exhausted the plans’ loan 

provisions. In addition, under current hardship rules, participants who 

could continue making retirement contributions after taking a hardship 

withdrawal are barred from doing so. This suspension of contributions 

also prevents participants from receiving employer matching contributions 

and will likely leave them with a lower account balance at retirement. 

Ensuring that participants choose the path that causes the least harm to 

their retirement accounts and continue to make retirement contributions 

whenever possible may help mitigate the adverse impacts of leakage that 

otherwise will linger into retirement. 

Page 35 GAO-09-715 401(k) Plans
 

Matter for 

Congressional 

Consideration 

To help participants recover more quickly from a hardship situation, 

Congress should consider changing the requirement for the 6-month 

contribution suspension following a hardship withdrawal. 

To support the goal of providing plan participants with understandable 

and useful information about their employer-provided retirement plan 

benefits, we recommend that the Secretary of Labor promote industry best 

practices by encouraging plans to take the following actions: 

Recommendations for 

Executive Action 

• Include on their participant Web sites information on their plan loan, 

hardship withdrawal, and cashout provisions, including examples of the 

long-term consequences of each provision. For example, plans could place 

a copy of the summary plan description in an electronic form that 

participants could reference as needed, or provide modeling tools. 

• Provide separating participants with a projection of their account balance 

under different scenarios, such as when assets are left in a tax-deferred 

retirement account compared with those assets cashed out in the form of a 

lump-sum distribution. 

To prevent unnecessary leakage and increase compliance with existing 

regulatory requirements, we recommend that the Secretary of the Treasury 

clarify that the loan exhaustion provision applies to all plans that permit 

both participant loans and hardship withdrawals, and require plans to 

document that participants have exhausted available plan loans before 

allowing a hardship withdrawal. 

We provided a draft of this report to the Secretary of Labor and the 

Secretary of the Treasury for review and comment. In comments on a draft 

of this report (which are reprinted in app. III), the Department of Labor 

agreed to consider our recommendations as it developed regulations and 

other guidance to assist plan participants and beneficiaries in 

understanding their benefits and distribution options. Labor also provided 

technical comments on a draft of this report, which we incorporated as 

appropriate. In its comments (reprinted in app. IV), the Department of the 

Treasury agreed to publish an article highlighting the requirements of the 

hardship withdrawal provisions, giving special attention to the scope of 

the loan exhaustion requirement and the need for plans to document 

compliance. 

Agency Comments 

Page 36 GAO-09-715 401(k) Plans
 

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

issue date. At that time, we will send copies of this report to relevant 

congressional committees, the Secretary of Labor, the Secretary of the 

Treasury, and other interested parties. In addition, the report will be made 

available at no charge on the GAO Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-7215 or bovbjergb@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 who made contributions to this report are listed 

in appendix V. 

Sincerely yours, 

erg 

Director, Education, Workforce, 

y Issues 

Barbara D. Bovbj

 and Income Securit

Page 37 GAO-09-715 401(k) Plans
Appendix I: Scope and Methodology 

Page 38 GAO-09-715 

Appendix I: Scope and Methodology 

The objectives of this study were to identify (1) the incidence, amount, 

and relative significance of the different forms of 401(k) leakage; (2) how 

401(k) plans inform participants about hardship withdrawal provisions, 

loan provisions, and options at job separation, including the short-term 

and long-term costs associated with each; and (3) what is known about 

how various policies may affect the incidence of 401(k) leakage. We 

conducted this performance audit from August 2008 to August 2009 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. We determined that the data that we 

analyzed were sufficiently reliable for the purposes of this report. 

To determine the principal forms of 401(k) leakage, we interviewed 

industry and academic experts, reviewed laws and regulations, and 

analyzed existing studies on leakage. We then identified cashouts at job 

change, hardship withdrawals, and participant loans as the three principal 

forms of leakage. 

Incidence and 

Amount of 401(k) 

Leakage 

To determine the incidence and amount of these principal forms of 

leakage over time, we analyzed data from the 1996, 2001, and 2004 panels 

of the U.S. Census Bureau’s Survey of Income and Program Participation 

(SIPP), using the data from survey respondents on their participation in 

401(k) plans contained in the Pension and Retirement Topical Module 

(collected in 1998, 2003, and 2006). We excluded SIPP participants who 

were younger than age 15 or older than age 60 at the time of the interview, 

and used this subset of the SIPP data to develop estimates of the number 

of 401(k) plan participants who reported taking a cashout, hardship 

withdrawal, or loan from their account prior to retirement. Because SIPP 

is based upon a probability sample, we followed the Census Bureau 

technical documentation in deriving all percentage and dollar-value 

estimates and the 95 percent confidence intervals that correspond to these 

estimates. 

To determine the aggregate loan default amounts over time, we analyzed 

published annual statistics from 1996 through 2006 the Department of 

Labor’s Private Pension Plan Bulletins Abstract of Form 5500 Annual

401(k) Plans
Appendix I: Scope and Methodology 

Reports and tabulated the amount of loan defaults that plan sponsors 

reported releasing to participants.1

 To determine the amount of early 

withdrawal penalties on qualified retirement accounts that plan 

participants paid, we analyzed published annual Internal Revenue Service 

(IRS) statistics from 1996 through 2006 on estimated individual income tax 

liabilities, credits, and payments. Because IRS reports the penalty amounts 

in aggregate for all qualified plans, including individual retirement 

accounts (IRA) and 401(k) plans, we were unable to isolate the penalties 

paid only by 401(k) participants. 

To determine the recent prevalence of leakage, we analyzed summary data 

on the incidence and amount of hardship withdrawals and loans from 2005 

through 2008 that we obtained from major 401(k) plan administrators, 

which represented about 22 million 401(k) participants and over $1 trillion 

in 401(k) plan assets. We were not able to acquire similar year-to-year data 

on cashouts from 401(k) plans. While the data that we received were not 

nationally representative, they provided a snapshot of the incidence and 

amount of the two forms of leakage in recent years at several of the largest 

401(k) plan administrators. 

Relative Significance of 

Leakage Forms 

To illustrate the relative significance of leakage over time, we developed a 

model to tabulate 401(k) account balances for various hypothetical 

individuals at age 65 that differed depending on when and whether these 

individuals tapped into their 401(k) account prior to retirement. We ran a 

range of scenarios to simulate the effect that various forms and amounts 

of leakage would have on a participant’s retirement savings. In developing 

these scenarios, we considered such factors as the participant’s age, 

earnings, wages, contribution rates, years until retirement, as well as 

historical and projected interest rates and earnings levels, loan 

administration fees, and penalties associated with leakage. We based our 

illustrations on an individual who was born at the beginning of 1970, began 

participating in a 401(k) plan at age 21 in 1991, and will retire at age 65 in 

2035. We used historical values and future projections for interest rate and 

 

1

Labor collects information on 401(k) participant loan defaults through the Form 5500. This 

form (1) includes information on the plan’s sponsor, the features of the plan, and the 

number of participants and (2) provides more specific information, such as plan assets, 

liabilities, insurance, and financial transactions. Filing this form satisfies the requirement 

for the plan administrator to file annual reports concerning, among other things, the 

financial condition and operation of plans. Labor uses this form as a tool to monitor and 

enforce plan sponsors’ responsibilities under the Employee Retirement Income Security 

Act. 

Page 39 GAO-09-715 401(k) Plans
Appendix I: Scope and Methodology 

rate-of-return assumptions as reported in past and projected under the 

intermediate cost assumptions in Social Security’s The 2009 Annual 

Reports of the Board of Trustees of the Federal Old-Age and Survivors 

Insurance and Federal Disability Insurance Trust Funds (also known as 

the 2009 OASDI Trustees’ Report). Also, we used scaled earnings for low, 

medium, and high annual earners as reported in past and projected in the 

2009 OASDI Trustees’ Report. We assumed that employee contributions 

to the 401(k) are 6 percent of the individual’s wages and received a 3 

percent employer matching contribution. Loans taken from the 401(k) 

incur a $100 fee that is deducted from the account balance, were taken out 

at the beginning of the year that the individual reached the age indicated in 

our analyses, and were repaid over a 5-year period at a fixed interest rate 

equal to the rate of return at the time that the loan was made. Hardship 

withdrawals from the 401(k) incur a 10 percent tax penalty for early 

withdrawal and are taken out at the beginning of the year that the 

individual reaches the age indicated in our analyses, and participant 

contributions and employer matching contributions are suspended for the 

subsequent 6-month period. Partial and full cashouts also incur a 10 

percent tax penalty for early withdrawal and are taken out at the 

beginning of the year that the individual reaches the age indicated in our 

analysis. We generally assume (except where otherwise specified in the 

report) that the individual does not resume his or her own and employer 

matching contributions to a 401(k) account for 12 months. Finally, we 

calculated the amount of forgone retirement savings at age 65 for an 

individual who took a loan, hardship withdrawal, or partial cashout in the 

amount of $5,000. 

To determine how plans inform participants about leakage, we 

interviewed 26 plan administrators representing at least 80 percent of 

401(k) participants and 65 percent of 401(k) assets. We selected our 

sample of administrators using industry rankings of the leading firms that 

were based on the number of plans and participants, the value of the plan 

assets, and the quality of their participant services. To ensure a range of 

views, we contacted 401(k) plan recordkeepers, plan sponsors, and thirdparty administrators representing large and small 401(k) plans. As part of 

these efforts, we conducted 10 site visits during which we interviewed 

representatives and toured a participant call center. The documents that 

we reviewed included plans’ mandatory tax notices, summary plan 

descriptions, plan brochures, loan and hardship withdrawal forms, and 

prototype plan documents. We also reviewed selected 401(k) plan sponsor 

and administrator Web sites, current law, and regulations. To learn about 

industry standards and practices, we interviewed 401(k) plan 

Participant 

Information 

Page 40 GAO-09-715 401(k) Plans
Appendix I: Scope and Methodology 

administrators; plan sponsors; industry and academic experts; and Labor, 

Department of the Treasury, and IRS officials and reviewed relevant 

literature. 

To identify what is known about how various policy options may affect the 

incidence of leakage, we reviewed provisions in current law, regulations, 

and legislative proposals and identified nine policy options likely to affect 

leakage. Next, we interviewed selected industry and academic experts to 

gather their opinions on which of these policy provisions would likely 

affect leakage. We selected experts who were cited in the literature on 

retirement leakage, were referred to us during interviews, and are known 

in the pension and retirement field. To ensure that we had a range of 

views, we included experts from academic, practitioner, participant 

advocacy, and industry backgrounds. We analyzed the experts’ responses 

and identified the provisions that they indicated were likely to affect 

leakage. We then used our illustration model to simulate the effect that 

each of the identified provisions may have on a hypothetical 401(k) 

participant’s retirement savings at age 65. These illustrations are based on 

an individual who is born at the beginning of 1970, begins to participate in 

a 401(k) plan at age 21 in 1991, and retires at age 65 in 2035. We use 

historical values and future projections for interest rate and rate-of-return 

assumptions as reported in past and projected in Social Security’s most 

recent 2009 OASDI Trustees’ Report under the intermediate cost 

assumptions. We used scaled earnings for low, medium, and high annual 

earners as reported in past and projected in the 2009 OASDI Trustees’ 

Report. In each scenario, we assumed that employee contributions of 6 

percent of the participant’s earnings to the 401(k) and received a 3 percent 

employer matching contribution. We used the following assumptions to 

distinguish each form of leakage: 

Policy Provisions 

Affecting 401(k) 

Leakage 

• Loans taken from the 401(k) incurred a $100 fee that is deducted from the 

account balance. We assumed that loans were taken out at the beginning 

of the year that the individual reached the age indicated in our analyses, 

and that loans were repaid over a 5-year period at a fixed interest rate 

equal to the rate of return at the time that the loan is made. 

• Hardship withdrawals from the 401(k) incurred a 10 percent tax penalty 

for early withdrawal and were taken out at the beginning of the year that 

the individual reached the age indicated in our analyses. Participant 

contributions and employer matching contributions were suspended for 

the subsequent 6-month period. 

Page 41 GAO-09-715 401(k) Plans
Appendix I: Scope and Methodology 

• Partial and full cashouts incurred a 10 percent tax penalty for early 

withdrawal and were taken out at the beginning of the year that the 

individual reached the age indicated by in our analyses. We generally 

assumed (except where otherwise specified in the report) that the 

individuals taking a cashout did not resume their elective or employer 

matching contributions to their 401(k) accounts for 12 months. 

Next, we ran five separate scenarios to simulate the effect of selected 

provisions on our hypothetical individual’s retirement savings at age 65. 

Specifically, we simulated the effect of each of the following scenarios: 

• effect of a total cashout of an entire 401(k) account at various ages; 

• effect of a loan default on a $5,000 loan after 1-year repayment; 

• effect of reducing the involuntary automatic cashout from $5,000 to $1,000; 

• effect of exhausting a plan’s loan provision before taking a hardship 

withdrawal; and 

• effect of a 6-month contribution suspension following a hardship 

withdrawal. 

Page 42 GAO-09-715 401(k) Plans
Appendix II: 401(k) Administrators That GAO 

Contacted 

Page 43 GAO-09-715 

Appendix II: 401(k) Administrators That GAO 

Contacted 

ADP Retirement Services 

Aon 

Barclays 

Capital Research 

Centier Bank 

Charles Schwab 

Diversified Investment Advisors 

Fidelity 

Hewitt Associates 

ING 

JP Morgan Chase 

John Hancock Financial Services 

Marshall & Ilsley Trust Company 

Merrill Lynch 

Mercer 

MetLife 

Mass Mutual 

Nationwide 

New York Life 

Prudential 

State Street 

T. Rowe Price 

Vanguard 

Wachovia 

Watson Wyatt 

Wells Fargo & Company 

401(k) Plans
Appendix III: Comments from the Department Appendix III: Comments from the of Labor 

Department of Labor 

Page 44 GAO-09-715 401(k) Plans
Appendix IV: Comments from the Department Appendix IV: Comments from the of the Treasury 

Department of the Treasury 

Page 45 GAO-09-715 401(k) Plans
Appendix V: GAO Contact and Staff Appendix V: GAO Contact and Staff Acknowledgments 

Acknowledgments 

401(k) Plans

Barbara D. Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov GAO Contact 

In addition to the individual listed above, David Lehrer, Assistant Director; 

Jonathan S. McMurray, Analyst-in-Charge; Nicole Harkin; and Gene 

Kuehneman made key contributions to this report. Carl Barden, Susannah 

Compton, Cathy Hurley, Ed Nannenhorn, Roger Thomas, and Walter 

Vance also made important contributions. 

Staff 

Acknowledgments 

Page 46 GAO-09-715 (130869) 
GAO’s Mission The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday afternoon, GAO 

posts on its Web site newly released reports, testimony, and 

correspondence. To have GAO e-mail you a list of newly posted products, 

go to www.gao.gov and select “E-mail Updates.” 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Phone The price of each GAO publication reflects GAO’s actual cost of 

production and distribution and depends on the number of pages in the 

publication and whether the publication is printed in color or black and 

white. Pricing and ordering information is posted on GAO’s Web site, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information. 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Ralph Dawn, Managing Director, dawnr@gao.gov, (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, DC 20548 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548 

Public Affairs 

Please Print on Recycled Paper