The Impact of Leakage on 401(k) Accumulations

A new analysis from the Employee Benefit Research Institute (EBRI) shows preretirement 401(k) account withdrawals often have a negative impact on long-term wealth accumulation.

EBRI conducted the analysis of 401(k) plan leakage on behalf of the Department of Labor’s ERISA Advisory Council, finding leakage due to preretirement access to 401(k) savings by workers through loans, hardship withdrawals or cash payout at job changes can significantly damage an individual’s retirement readiness by age 65.

Utilizing the institute’s proprietary Retirement Income Projection Security Model (RSPM), EBRI researchers show that the combined impact of the three primary types of 401(k) leakage reduces the probability of an individual reaching an 80% real income replacement rate (including Social Security benefits) by 8.8% for the lowest-income quartile and 7.0% for those in the highest-income quartile. However, the analysis also shows that approximately two-thirds of the leakage impact is associated with cashouts that sometimes occur at job change, rather than loans or hardship withdrawals.

Despite the clear and negative impact of leakage on long-term retirement readiness, EBRI says it’s far from clear that cutting off participant access to hardship withdrawals or loans would improve outcomes.

As EBRI Research Director Jack VanDerhei explains, “It’s one thing to quantify the impact of not allowing early access to these funds—and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes.” For example, participants may be forced to reduce ongoing contributions to 401(k) accounts if not permitted to take a loan, potentially offsetting some or all of the prospective gains realized by restricting participant access to retirement funds.

“This analysis needs to be accompanied by a very strong caveat that there are clear data gaps that will need to be filled,” VanDerhei adds. “For example, we have found in previous research that participants in plans with a loan option have higher contribution rates than those without such access, and a similar relationship may exist with respect to the availability of hardship withdrawals.”

EBRI says removing or restricting these plan options would likely reduce levels of 401(k) participation or access, and that could result in a significant drop in retirement savings for some employees eligible for participation in a 401(k) plan.

Results of EBRI’s leakage modeling were presented by VanDerhei at a June 17 hearing of the ERISA Advisory Council at the U.S. Department of Labor. His full testimony on the impact of leakages on 401(k) accumulations at retirement age is online at