A thick layer of thatch will inhibit the movement of water through to the root zone. Like a sponge, the thatch soaks up water and creates drought-like conditions for the grass. Roots will tend to grow in the thatch layer to seek out the moisture rather than growing deep into the soil. This creates a weak lawn which is very susceptible to drought or injury from wear. Too much thatch will also interfere with fertilizer and pesticide uptake since they get tied up in the thatch layer and may never reach the root zone.
Concentrated chemicals can harm the soil microorganisms.
This is why watering the lawn after an insecticide application is recommended. Diseases will tend to invade thatchy lawns because the naturally occurring soil microorganisms are not thriving and unable to fend off invaders. There are many factors that can contribute to an excess accumulation of thatch. Essentially, the problem is too low a rate of decomposition of the dead and dying plant material. One cause is the absence of earthworms and a decline in the population and activity of the soil microorganisms.